We must keep in our mind that all the three stages must positively allow the stocks to get ahead. It is found that if a stock does not qualify for any of the stage; it does not qualify for the next step.
The Need for a Multi-Faceted Approach
- The first screen identifies the main trend using a trend-following indicator in a higher timeframe.
- There are many ways to trade Alexander Elder’s triple screen trading strategy.
- Sell signals can include a high price-to-earnings ratio or a high relative strength index but they can also simply be a decision.
- The MACD histogram’s upward or downward movement indicates the current trend’s direction.
Dr. Alexander Elder invented the Triple Screen Trading System, which filters out contradicting trading signals using various indicators. The method is founded on the notion that no single indicator can properly assess the complexity of financial markets and that different indicators can give conflicting indications for the same market. The first screen identifies the main trend using a trend-following indicator in a higher timeframe. The second screen looks for corrective waves using an oscillator to identify entry points. The third screen identifies exact entry points using support/resistance levels or previous highs/lows in a lower timeframe.
Alexander Elder Trading Strategies: The Triple Screen Strategy (Backtest)
So, the Triple Screen trading system dictates that you consider three trend lengths — in line with the Dow theory. The triple screen trading system is an advanced strategy designed for experienced traders looking to refine their trading approach. The RSI is a good tool, giving a fairly precise indication of the market’s strength and the moments where it is safe to open a position. As we are planning to buy on a rising correction trend, we will try to catch a good moment to open a long position. On the H1 chart of platinum, we see that it has crossed the oversold level. We now proceed to the third screen to pick the level to open longs.
The observed example provides a strategy for the local uptrend following a general downtrend. You try to “ride the wave” – on the falling market, buy at the low and sell at the high of each cascade. We see that the MACD has reached the extreme low below the signal line (the selected area on the image below). While the Stochastic Oscillator shows the fast (solid) line crossing the slow (punctured) line bottom-up within the 0-20% zone. Both are normally interpreted as signs of an oversold market and a signal to buy. Thus, we now have confirmation from two indicators that our market interpretation is likely correct and our strategy has a high chance of being successful.
Each screen displays the price chart of a single instrument over a specific timeframe, along with other indicator signals. The triple-screen method involves subjecting every possible trade to three screens or tests, which are a mix of trend-following indicators and oscillators. A trade setup, which passes all three screens holds the best opportunity to become a success.
The key steps of the triple screen trading system
You can also choose to use the daily chart or H4 chart, instead of the weekly chart, for screen 1 if your trading timeframe is H4 or H1 correspondingly. But it is important to know that a trend really depends on which timeframe you are looking at. For instance, the trend may be up on the daily chart, but when you look at a four-hour chart, it may be down.
They are meant to be used in combination, including in situations when they contradict each other. Despite being invested only 22% of the time, it has generated almost 5% annual returns (buy and hold has generated 7%). We think this is pretty good, however, the performance seems to be slowly declining in recent years.
How does the triple screen trading system work?
If the order was executed, the stop loss is set to the two-day low. In that case, you can decide to open a buy trade when the Force Index Indicator is in a negative region with an upward pullback momentum. However, as the number of traders in the world has grown, the market has gotten increasingly complex. Many traders nowadays follow the intermediate and short-term using various time frames. Elder’s Triple Screen system involves finding and choosing trades according to three criteria i.e. three screens of the approach.
- Traders can also refine the approach based on lessons learned for future trades.
- These products may not be suitable for everyone, and it is crucial that you fully comprehend the risks involved.
- To take an entry for buy, we should allow the price to close above the top of the previous high and of course, low has to be higher in comparison to the previous day.
- There’s another problem with popular trend-following indicators that must be ironed out before they can be used.
- Each will be reflected in one of the three screens, as the table below shows.
By following this three-screen approach, traders aim to align their trades with the overall trend while minimizing false signals. The Triple Screen Trading System encourages a comprehensive analysis of multiple timeframes to increase the probability of successful trades. According to the Alexander Elder trading strategy, the third screen is used to place trading positions, either buy or sell orders, based on the analysis of the 1st and 2nd screens. Long-term trend direction can be identified by employing a trend indicator like the MACD in the long-term time frame.
In order to qualify for trading, a stock must pass through all three different stages with positive marking. Dr. Elder worked for many years as a psychiatrist in New York before becoming involved in financial trading. He’s written dozens of articles and books since that time, including “The New Trading for a Living,” first published in 1993. One of them has sold 30,000 copies, a record for a financial book in Norway. We will enter only above the high of the marked candle in the chart.
What Characterizes a Day Trader?
The triple screen trading system conducts three tests on each trade to determine the profit potential of the trade and avoid following contradictory signals. A trade idea should ideally pass all three tests before being tested in live markets. It’s a preferred time to buy when the long-term time frame’s price action is bullish, and the Bears Power is in the negative zone (under the 0 mark), but the direction starts to climb up. If the weekly timeframe is bullish, you should consider the Elder Ray indication in the intermediate time frame (1 day). When the oscillator hits the overbought/oversold zone, an entry indication in the direction of the tide (long-term trend) will appear. We identify the trend using traditional technical analysis methods and extra indications from trend indicators.
Elder developed a system to combat the problems of simple averaging while taking advantage of trend-following and oscillator techniques. By using three distinct timeframes, the system provides accurate signals for entry and exit points. Its complexity requires a deep understanding of market trends and discipline, making it ideal for those with intermediate or advanced trading experience.
There are indicator options and advanced functions that make this system possible. Before diving straight into this method, back-test your strategy on a demo account on MetaTrader4 by looking into the past performance. We can speak about a long-term upward trend if the MACD histogram has flipped and is going upwards from the region below 0. If the MACD histogram has flipped and triple screen trading system is going downhill from the region above zero, the market is in a long-term decline.
New versions typically add other indicators but using the naked eye to spot price action here is a completely acceptable method. After identifying the direction of the main trend, we look for a corrective wave in the opposite direction on our screen 2 so we can get into the market at a beneficial level. To achieve this, we apply an oscillator to the chart, which would help us know when the corrective wave is about to end (oversold or overbought). Please read here for a briefing on what happens when stock markets are oversold. After a trade entry is taken, the market is expected to move in line with the dominant trend for the trade to make profits. This timeframe offers an opportunity to time trades more accurately.
If the tide points towards an uptrend, the wave should be used to identify an entry point in the direction opposite of the direction. The first screen uses an indicator that is one order of magnitude greater than your chosen time frame, it allows you to analyze a broader view of the trends. There are several possible indicators you can use for this, such as the MACD indicator. Williams Percent Range is frequently abbreviated as Williams%R or simply %R. Larry Williams, a known commodity trader who also works in the stock and forex markets, created the indicator. Williams%R was released in 1973 and is listed as an oscillator due to its signal value, which swings between 0 and -100.
