The Triple Screen Trading system was developed by Dr. Alexander Elder in 1985. Most people who trade adopt a single screen or indicator which is applied to each trade. The Triple Screen Trading system works on the assumption that because the market is complex, a single screen cannot work every time under every possible market condition. As the name suggests, the triple screen system applies three screens or tests to every trade decision. Each stock must pass through three steps, one at a time, with positive marking, in order to qualify for the next step.
Step 1: Market Tide – The Long-Term Trend
You need to start by identifying the market tide, or long-term chart, as a basis for the decisions you make. Pick a timeframe that is one order of magnitude larger than the timeframe you plan to trade, so that if you would generally analyze daily charts, you must now focus on the weekly charts. Use at least three trend-following indicators to identify long-term trends in the market. If they all show a positive sign, you can reasonably say that the trend is up. In this case, you can move on to the second step.
Step 2: Market Wave – The Intermediate Trend
You will need to identify the status of momentum in the second step. While you have already identified the trend in the weekly chart, you now need to look at the daily chart. Use stochastic only in the daily chart to help catch the short-term momentum, or the market movement that is contrary to the tide determined in step one. This will help you combine the trend in direction and momentum to help determine an optimal entry point. It may be necessary to wait for a correction in the short-term momentum in order to move from the second to the third step.
Step 3: The Ripple – The Short-Term Trend
Once you have passed the first two steps, you will be at the final step which is where you decide on the action that should be taken. In this step you will use a trailing stop and look for short-term breakouts in the direction of the long-term trend (tide). This involves examining the trends and the price to determine when to buy. Look at whether there is an uptrend or a downtrend and examine the stochastic.
This system involves using tight stop losses on any open position. Here we have looked at using the daily chart and weekly chart, but the same concept can be applied to the weekly chart and monthly chart. The key is to determine the trend in the longer-term chart and then to apply the stochastic to the shorter-term chart in order to determine an optimal entry point so work out the action that should be taken. This is a more complex system than single screen trading and while it will take more time to learn, it aims to account for more market conditions, so it will work more successfully, more often.