In Alexander Elder’s book The New Trading for a Living by Alexander Elder he introduces a trading strategy known as the “Triple Screen Trading System.” This approach is designed to help traders identify high-probability trading opportunities while minimizing risk.
The Triple Screen Trading System consists of three screens or steps that traders should go through before making a trading decision. Let’s break down each screen:
- First Screen: The Trend Screen
The first screen focuses on determining the long-term trend. This can be achieved by using a higher timeframe chart, such as the weekly or monthly chart. The goal is to identify the overall direction of the market. Elder suggests using a simple trend-following indicator, such as the 13-week exponential moving average (EMA). If the price is above the EMA, it indicates an uptrend, and if the price is below the EMA, it indicates a downtrend.
- Second Screen: The Confirmation Screen
The second screen is used to confirm the analysis from the first screen and identify potential trading opportunities. Traders switch to a medium timeframe chart, such as the daily chart. The focus here is to find pullbacks or corrections within the overall trend identified in the first screen. Elder recommends using oscillators, such as the MACD (Moving Average Convergence Divergence) or Stochastic Oscillator, to spot overbought or oversold conditions. The idea is to look for buying opportunities in an uptrend when the oscillator becomes oversold and for selling opportunities in a downtrend when the oscillator becomes overbought.
- Third Screen: The Timing Screen
The third screen is used for precise timing of entries and exits. Traders switch to a lower timeframe chart, such as the hourly or 15-minute chart. The purpose here is to fine-tune the entry and exit points using short-term indicators or patterns. Elder suggests using indicators like the Force Index or candlestick patterns to time entries and exits more accurately.
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.
It’s worth noting that while this strategy is outlined in Alexander Elder’s book, individual traders may adapt and customize it based on their own trading style, preferences, and risk management rules.