Trading with Elder’s triple screening strategy

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Updated: 07 April 2020

In 1986, Dr. Alexander Elder developed the Triple Screen trading system to eliminate false indicators and signals. The theory behind this system is that a single indicator cannot predict and analyze market conditions on its own, so it uses more than one indicator. It has become one of many reliable trading strategies and allows you to reduce your risk of losses. This system conducts three tests on each trade to determine the profit potential of the trade and avoid following contradictory signals.

Key indicators used for the triple screen system

The Triple Screen system combines the use of trend-following indicators with oscillators to cover all bases of technical analysis. This is because trend-following indicators work best during trending markets and perform poorly during range-bound markets, while the opposite applies to oscillators. Suggested oscillators for this system include Forex Index, Elder-ray, stochastic and Williams %R.

In agreement with the Dow theory, this method focuses largely on the times used, as each time will have different results. There are three main trend lengths that should be used: the long-term trend (the tide), the intermediate trend (the wave), and the short-term trend (the ripple). The intermediate trend length is the most common for this purpose, and it would be found on a daily chart. A long-term trend would then be found on a weekly chart, while a short-term trend could be found on a four-hour chart.

The method behind the system

The first screen in this system analyzes a time period that is larger than your chosen chart to spot the long-term/tide trend and its direction. The second test places an oscillator on your chosen chart that allows you to spot the intermediate trend, or the wave. This is used to locate your prime entry point. The third screen then searches for temporary breakouts in the tide’s direction by assessing the ripple, which is done with a trailing stop loss order. For this method, stop losses are essential.

Screen one

Because 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, which you can discover by using a demo account on any of the available Forex and CFD brokers. Once the direction of the long-term trend has been determined, you will have your trading direction for the intermediate chart, either to buy in the uptrend or sell in the downtrend.

Screen two

The second screen is used to find a wave heading in the opposite direction from that of the tide in order to find an entry position. For example, if you had a daily chart for your intermediate time frame and the weekly chart reveals an uptrend, you would be searching for decline in the market.

Screen three

When both the first and second screens have been confirmed, a trailing stop will be used for the third screen to carefully locate the entry point. A trailing buy-stop would be placed one tick above the previous day’s high point when placing a long position on a daily chart. Alternatively, a short position would require a trailing stop-sell to be placed one tick below the previous day’s low point. You can continue trading until the weekly trend moves in the opposite direction or until the trade is activated.

Application in MT4

This system can easily be set up when using the MetaTrader 4 platform. There are indicator options and advanced functions that make this system possible. Before diving straight into this method, back-test your strategy on the platform with the various indicators that appeal to your own trades and style. Although there was immense trepidation surrounding falling volumes, the impact has been negligible.