The Triple Screen trading system applies multiple trading indicators instead of a single indicator. The idea is to use as many indicators as possible to filter out false signals. The system was developed by Dr. Alexander Elder in 1985 and first appeared in 1986 in the Futures Magazine. Dr. Alexander was a psychiatrist but later switched to financial trading. Elder maintained that no single indicator was up to the job of correctly and consistently analysing the complexity of the financial markets.
What is the Triple Screen trading system?
There are some traders who use one technical indicator for analysing the forex market and executing trades. And, there is nothing wrong with that approach. But, Dr. Elder argued that the use of a single indicator is not right.
The Elder trading system came in response to a well-known problem that certain technical indicators only work in a certain market environment. For example, trend-following indicators perform well only when the market is trading, and tend to give false signals when the market is range-bound.
He gave the concept that one indicator can’t withstand the complexity of the financial markets. Not even a single indicator can be considered a “perfect indicator.” He further added that an indictor couldn’t work on every timeframe under each condition.
There are many explanations to Dr. Elder’s arguments.
For instance, when the market is trending upwards, trend indicators like moving averages give buy signals. Conversely, momentum oscillators like Stochastics indicate an overbought condition, which means a sell signal. The opposite can be applied when the market is in a downtrend.
When the market is trending, trend indicators can perform best, but when the markets start ranging, they could produce false signals. Similarly, for ranging markets, oscillators may work best to spot overbought and oversold conditions, but when the market comes in the trend, they could show flaws.
Some traders tried to trade an average of the buy and sell signals generated by multiple indicators. But, this strategy flopped. If buy signals from oscillators are more dominant than trend indicators, then as expected, the trader would select signals from oscillators. And as mentioned in the above argument, oscillators perform best in ranging markets and not when the market is trending.
So, Dr. Elder developed a trading system that eliminates simple averaging problems combined with the best trend and momentum indicators.
The system gets its name “Triple Screen” from medical sciences. As Dr. Elder was associated with medical sciences, he gave this system a name Triple Screen based on the Triple Marker Screen Test.
Some people confuse the terminology Triple Screen with three screens. However, the system involves applying three tests on every trade with trend and momentum indicators.
Before selecting trend indicators for the system, it’s essential to combat an issue regarding timeframes. Trend indicators can present different signals on different timeframes. For example, an indicator may show buy signals on the 5-minute chart while displaying sell signals on the daily chart.
To solve this problem, a trader can divide timeframes into units of five. For example, in day trading, there are 5 to 6 trading hours. A trader can divide each hour into five segments. This way, trend indicators wouldn’t give conflicting signals.
How to use the Triple Screen trading system?
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.
One way to implement the Triple Screen system is to trade with the trend. The system divides timeframe of the trend into three sections:
- Long-term trend referred to as a tide.
- Intermediate-term trend labeled as a wave.
- Short-term trends also called ripples.
Using trend indicators, a trader would look for the long-term trends (by dividing timeframe into five segments). Then, he would apply these indicators to the intermediate timeframe. These indicators would then give a trader exact entry and exit points whilst trying to eliminate any false signals.
An example combination of trend indicators for the Triple trading system is Moving Averages and MACD Histogram.
In the same way, momentum oscillators can be applied in the ranging markets.
Triple Screen trading system Conclusion
Triple Screen trading is a complex system developed by Dr. Elder. 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.
There are two ways to apply this system; by trend trading and reversal trading against the trend. It involves combining multiple indicators to try and form a more complete market analysis. There is some evidence that following long-term trends in major Forex currency pairs has been a profitable trading strategy, and this is how the Elder triple screen trading system works.
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