Monday, 9 January 2017

Triple Screen Trading System

A few days ago I finished Alexander Elder's 'The New Trading for a Living'. It was a very enjoyable and educational read on the three pillars of success in trading. The topics covered ranged from psychology, trading strategies and risk management. In this blog post I am going to summarize a strategy I have been using at work- Elder's Triple Screen Trading System. 

As its name suggests, the Triple Screen System applies three filters to a trade to increase the probability of success. 

When I first started day trading last year I kept searching for a single magical technical indicator. Whilst some have proven helpful, over-reliance is a dangerous habit as once the market changes the indicator's effectiveness might weaken. I also found a lot of indicators to be contradictory. It is important to learn the difference between trend following indicators versus oscillators. Both indicator types are integrated into the Triple Screen System. 

Time Frames

I personally prefer analyzing daily charts for key levels. This means the daily time frame is my intermediate time frame in the Triple System. Going by factor of 5 as recommended by Elder, this means the long term time frame is weekly and the short term time frame is hourly. Because of the nature of intra day trading where positions are sometimes held for less than an hour, I also like to analyze 10 minute, hourly and daily charts. 

First Screen

Examine the long term chart (weekly) using a Trend Following Indicator. Trade only in its direction. I currently use MACD and exponential moving average. Simple moving averages have the disadvantage of not being able to be weighted towards the more recent market sentiment and will change as each day drops off the formula. 

An uptick/downtick of the chart is how you identify long term trend change. When the indicator turns up below its centre line, the best market tide buy signals are given. When the indicator turns down from above its centre line, the best sell signals are issued.

Examples: Directional System, or slope of 13 week exponential moving average, weekly MACD histogram, Seasons

Second Screen

Examine the intermediate chart (daily) using Oscillators. Daily deviations from the longer term weekly trend are indicated by oscillators. Even though they issue buy signals when market is falling and sell signals when market is rising, we focus only on the daily signals that point in the direction of the weekly trend.

Examples: Force Index, RSI, Elder-Ray Index, Stochastic, Williams %R

Third Screen

Examine the short term chart (hourly) chart to time entry. When first screen says weekly trend is up, and second screen says daily trend is down, placing a trailing buy stop will catch upside breakouts. When the first screen says weekly trend is down, and second screen says daily trend is up, placing a trailing sell stop catches downside breakouts.

The disadvantage of this technique is running wide stops. If you buy a break out higher than the previous day's high and your stop is below that day's low, this is a wide stop after a wide range day. Or, if the previous day had a narrow trading range, placing a stop below the low would just risk market noise cancelling a good trade.

The alternative is to use "average EMA penetration". The focus is on how deep the pullbacks drop below the fast exponential moving average. E.g. in an uptrend, measure how deeply prices penetrate below their exponential moving average during normal pullbacks. After marking in some points and how much they drop below, calculate the average. Calculate the difference between the exponential moving average level of today and tomorrow and add this difference onto today's exponential moving average to forecast tomorrow's exponential moving average level. Subtract the average penetration from tomorrow's estimated exponential moving average level- you are looking to buy at this pullback level to get in cheap and make the most of the uptrend. 


In my next blog post I will be explaining different trend following indicators and oscillators in more detail. 

No comments:

Post a Comment