Discover the Triple Screen Trading System
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The Triple Screen Trading System was developed by Dr Alexander Elder and first appeared in a 1986 article in Futures Magazine. It utilises multiple trading indicators as a means to filter out contradictory trading signals. Elder maintained that no single indicator was up to the job of correctly and consistently analysing the complexity of the financial markets.
As he pointed out, different indicators may give you opposite signals for the same market. To try and solve this problem, the Triple Screen trading system subjects every potential trade to three tests. The trades that pass all three tests should theoretically offer better chances for profit than those that fail one or more of the tests. So how does this method work in detail? Let's take a look!
Indicators Used in Alexander Ray's Triple Screen Trading System
It's a generally-accepted piece of theory in the field of technical analysis that trend-following indicators don't work well when the market is range-bound, while oscillators don't perform well in trending markets. In a range-bound market, oscillators will perform well, however, and trend-following indicators are naturally-suited to trending markets.
The Triple Screen trading system combines trend-following indicators with oscillators in a way that is designed to take advantage of their strengths, while filtering out those occasions when they perform badly. Dr Alexander Ray recommended using the Force Index and the Elder-ray as oscillators. He also suggested the Stochastic and the Williams Percent Range indicators as oscillators that would work well with the system.
Another challenge when it comes to conflicting signals is that a trend really depends on which time frame you are looking at. For example, if you are looking at a daily chart, the trend may be up, but when you look at a four-hour chart, it may be down. The Triple Screen trading system dictates that you consider three trend lengths, a concept that dates all the way back to Dow theory.
These three trends are:
- The long-term trend — also referred to as the 'tide'
- The intermediate trend — also called the 'wave'
- The short-term trend — also known as the 'ripple'
The intermediate trend should be for the time frame you are aiming to trade with. The system was originally designed to use a daily chart for the intermediate time frame. The long-term trend can be seen on a chart of one-magnitude greater than the intermediate time frame.
For example, if you are aiming to trade on a daily chart, the long-term trend would be governed by a weekly chart. The short-term trend would be one order of magnitude shorter. In our example, this would be a four-hour chart. The concept of these different time frames play a part in the Triple Screen method, as we will discuss in the next section.
The Method Used for the Triple Screen Trading System
As the name of the system suggests, there are three screens applied to each trade. The three screens are as follows:
- First screen – analyses a time frame one order of magnitude greater than the chart you plan to use to trade.This identifies the direction of the tide (the larger trend) with a trend indicator.
- Second screen – applies an oscillator to the chart that you wish to trade in order to identify the wave, which is a market movement contrary to the direction of the tide. This is completed with a view to achieving an optimal entry point.
- Third screen – analyses the ripple and searches for short-term breakouts in the direction of the tide using a trailing stop.
The Triple Screen trading system uses tight stop-losses on any opened position. Elder recommended for long positions that you use a stop one tick below the low of the current or previous bar (whichever is lower). For short positions, the stop would go one tick above the high of the current or previous bar (whichever is higher).
The first screen looks at the bigger picture. As we noted above, this is performed using a trend indicator on a chart that is one order of magnitude longer than the time frame on which you wish to trade. The original Triple Screen trading system used the MACD indicator for identifying the direction of the larger trend on a weekly chart. You can use whichever trend indicator you feel is best, however.
One of the best ways to determine which indicator is most suitable for your purposes is to experiment with a demo trading account. The risk-free nature of demo trading allows you to discover what is effective via trial and error, while still using genuine live market prices.
Once the first screen identifies the direction of the tide, this is the only direction in which you will be allowed to trade when looking at your intermediate chart. So if your trend indicator signals that it is an uptrend, you can only buy. If it says the tide is flowing in the direction of a downtrend, you can only sell.
Once we know the direction of the tide, we are looking for a wave in the contrary direction on our intermediate chart that will give us a beneficial entry. Let's suppose that you are looking at a daily chart as your intermediate time frame, and the weekly chart shows that the larger trend is upward.
You are now looking for a daily decline which would provide you with an advantageous opportunity to buy the market. We would do this by searching for a buy signal from our oscillator of choice on the daily chart. Any sell signals in this case would be ignored because the uptrend from the first screen has already filtered those out.
We move to the third screen once we get agreement from the first and second screen: that is, when the larger trend is up, and an intermediate decline has generated a buy signal from our oscillator, or when the larger trend is down and an intermediate rally has generated a sell signal. The third screen is a technique using a trailing stop to determine the specific entry point.
If we are aiming to go long in the market with a daily chart used in the second screen, we use a trailing buy-stop one tick above the high of the previous day.
If we are aiming to go short, we use a trailing sell-stop one tick below the low of the previous day. Let's suppose that the weekly trend is up, and a daily decline has issued an oversold signal from your oscillator (i.e. a buy signal). You would then place a buy stop one tick above the high of the previous day.
If the market resumes its uptrend and hits your stop, you will go long on the market. If the market continues to decline, your stop will be deactivated. You would then trail your stop by dropping it to one tick above the high of the day just passed. You would keep trailing until activated, or until you see the weekly trend change direction.
Using the Triple Screen Trading System in MetaTrader 4
As the system was originally designed to use weekly charts for the tide and daily charts for the wave, those will be the time frames we'll use as an example. Below is a weekly EUR/USD Forex chart from MetaTrader 4 (MT4) with the MACD applied with default settings:
Source: MetaTrader 4 - price data from Admiral Markets - weekly EUR/USD chart - Data Range: July 12, 2015, to October 29, 2017 - Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.
The slope of the MACD histogram, which appears beneath the main price chart, indicates to us the trend of the tide. An upward slope suggests an uptrend, and a downward slope suggests a downtrend. A key buy signal is when the indicator turns upward from beneath the centreline. A key sell signal is when the indicator turns downward from above the centreline.
We can see in early May 2017 (in the graph below) that the MACD crosses up above the centreline (specifically it crosses on May 5, 2017). We'll use this period for our example and proceed to apply our second screen. We are using a daily chart for our intermediate time frame. Below is a daily EUR/USD Forex chart with two oscillators applied:
Source: MetaTrader 4 - price data from Admiral Markets - daily EUR/USD chart - Data Range: March 23, 2017, to June 29, 2017 - Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.
The first oscillator is a two-day EMA Force Index. The second oscillator is the Stochastic oscillator, using default values. The Force Index displays buying opportunities when it falls below its centreline, and selling opportunities when it rises above the centreline. The Stochastic oscillator displays buying opportunities in oversold areas (below 30) and selling opportunities in overbought areas (above 70).
As the weekly trend was up in May, we can only pay attention to buy signals during this period. At this time, we have the Force Index below 0, meaning that we could proceed to our third screen if this was the oscillator we were using. The RSI, however, does not show an oversold condition at this time. If we were using an RSI, we would take no action.
For our third screen, if we were following the buy signal from the Force Index, we would then place a stop to buy. As we received our signal on May 5, 2017, we would place the stop one tick above the high from May 4, 2017, which was 1.1529. We would then place a stop to buy at 1.1529. This level was not hit on May 6, 2017, so we would then trail it down to one tick above the high from May 5, 2017, which was 1.1493. We would keep trailing the stop lower until either we open a position, or the weekly trend changes.
If we open a position, we use a tight stop-loss order to manage our risk. This would go one tick below the high of the trade day or the previous day — whichever is lower. Conversely, for short positions, you would place a stop-loss one tick above the high of the trade day or the previous day — whichever is higher. If the market moves in your favour, you should move the stop-loss to your break-even level.
From there, trail the market to protect 50% of your running profits. A good way to decide whether this system works for you is by backtesting. MetaTrader Supreme Edition is a free plugin for MetaTrader 4 and MetaTrader 5 that offers an easy-to-use Trading Simulator precisely for this purpose. MTSE also greatly extends the selection of trading indicators available for you to use.
Triple Screen Summary of Trading Action
As we have seen, the Triple Screen trading system uses multiple timeframes and a combination of indicators. It also uses a tight stop-loss to enforce money management discipline. The table above provides a summary of action to take depending on the combination of the larger and intermediate trend. We hope that you have enjoyed this introduction to the Triple Screen trading system. If you would like to read more about Dr Alexander Elder's indicators, make sure to read the our related article on The Bulls And Bears Power Indicator!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.