"It does not matter how slow you go so long as you do not stop." - Wisdom of Confucius
January 19, 2012
Volatility-Based Trailing Stop for Think or Swim
This Thinkscript indicator is a volatility-based trailing stop, similar to the Chandelier Stop. When direction switches from short to long (or vice versa), the initial stop level is a specified number of multiples of the Average True Range (ATR) of the last ‘n’ bars. Then the value is trailed, getting tighter should volatility decrease or price move to new extremes. A close through the stop level signifies a trend change in this indicator; crossing the value and closing back on the other side does not.
The part of this indicator that was tricky is the trailing stop logic, as well as switching the direction of the indicator–long or short. Thinkscript runs in very linear fashion, and you can’t define an indicator at one point and then change the value at another point. The workaround is to put complicated logic gates into the definition itself.
There are two inputs here: The ATR factor, and the length for the ATR calculation. These can be reset from the studies window without changing the Thinkscript. If you want a different default value, change the code below to the value you want.
From Internet
January 19, 2012
January 9, 2012
mình nhìn thấy hoa sen…nhưng mình thích cách nghĩ của mí bạn =))
August 31, 2011
Trading Rules with Force Index
The two-day EMA of Force Index (FI) plotted on a histogram gives the shortest-term indication of the force of the bulls or the bears. When the 2-day-EMA FI of exceeds the centerline, the bulls are stronger. When it is below the centerline, the bears are shown to be stronger.
When used in conjunction with other trend-following indicators, the effectiveness of the 2-day-EMA FI can be even more enhanced. By using any other trend-following indicator to identify an uptrend, you can pinpoint the best buying points at the very moments that the two-day EMA of force index declines. When another trend indicator shows a downtrend, a two-day EMA of force index will identify the precise areas at which shorting is the appropriate trading decision.
To identify a short-term bottom in a market uptrend, wait until the two-day EMA of force index turns negative. You will then be buying when a longer-term uptrend is experiencing a temporary pullback. More specifically, place your buy order above the high price of the day when the two-day EMA of force index turns negative during an uptrend. You are then protected from a decline in prices as your order will not be executed if prices decline; however, if, as expected, the uptrend resumes, your long order will be filled in a strong bull uptrend.
In the case where a two-day EMA of force index turns positive in a market downtrend, the preferred strategy is to sell short. This is a quick opportunity provided by market bullishness, allowing you to place an order to sell short just below the low of the latest price bar. If the quick dose of bullishness is sustained longer than anticipated, you can raise your sell order every day to stay within a tick of the latest low. Then, when prices slide, your short trade is executed, and you can place a protective stop above the high of the latest price bar (or the previous bar if that was the higher price). You can then move your stop to break even as soon as possible.
You can use the two-day EMA of force index also to add to your long and short positions: you can add to long positions in an uptrend every time force index turns negative, and supplement your shorts when force index turns positive.
On a longer-term basis, when two-day EMA of force index falls to its lowest level in a longer period of time (a month, for example), the bears have exceptional strength, and prices will likely fall even lower. Alternatively, when a two-day EMA of force index rallies to its highest level in a month, bulls are exhibiting strength, and prices are likely to rise higher.
August 17, 2011
Chart Bars - Inside day, Outside day and Variations
- An inside day is the situation whereby the range of the current bar is entirely inside the range of the previous bar.
- An outside day is the situation whereby the range of the current bar is entirely outside the range of the previous bar.
- Variations of inside and outside days whereby some bars have equal highs and lows and are either inside or outside the previous bar.
Notes:
In lower time-frame charts, inside, outside day and variations could be one of following patterns:
July 25, 2011
Calculating the Heikin-Ashi Bars
Calculating the Modified Bars
Normal candlestick charts are composed of a series of open-high-low-close (OHLC) bars set apart by a time series. The Heikin-Ashi technique uses a modified formula:
xClose = (Open+High+Low+Close)/4
o Average price of the current bar
xOpen = [xOpen(Previous Bar) + xClose(Previous Bar)]/2
o Midpoint of the previous bar
xHigh = Max(High, xOpen, xClose)
o Highest value in the set
xLow = Min(Low, xOpen, xClose)
o Lowest value in the set
July 16, 2011
MACD settings
Standard indicator settings for MACD (12, 26, 9) are used in many trading systems, and these are the setting that MACD developer Gerald Appel has found to be the most suitable for both faster and slower moving markets. In order to get a more responsive and faster performance from MACD one can can experiment with lowering MACD settings to, for example, MACD (6, 12, 5), MACD (7, 10, 5), MACD (5, 13, 8) etc.
These custom MACD settings will make indicator signal faster, however, the rate of false signals is going to increase.
21,55,8 settings slow down MACD but can be used to reduce the amount of false signals generated by the MACD indicator.
July 1, 2011
Moving Average Bounce
Moving Average Bounce is a common trade setup used by active traders. This entry will outline what should be expected with the most important information.
The basis to form the strategy is the idea that when an equities price is moving away from its moving average, there is a tendency for the price to retrace back to the moving average, but then continue the original move. And, it is the bounce in the moving average bounce trading system.
What to Look For
There are three things you should observe when you’re looking to initiate a trade using the moving average bounce trading system:
- A move away from the moving average line,
- A retracement toward or through the EMA line,
- A bar that breaks.
Type of moving average: Commonly, exponential moving average (EMA) is used.
Periods to be used with EMA: EMA length can be adjusted to suit different markets. EMA(34) is preferred to apply for short term trades.
Price to be used with EMA: Close price is normally used with EMA. But in some cases, typical price, which is calculated as (High+Low+Close) / 3, is used with EMA – with this price, EMA is also known as the HLC average.
A move away from the moving average line: First thing we expect to see. There is no default distance the price should move, but the price bars should no longer be touching the moving average.
A retracement: This is the time when price and EMA converge, the price moves back towards the moving average. Be sure this is a retracement, not just a period of sideways trading. It is important that you see at least four bars that move toward the moving average, because this usually means that this is a true retracement.
Price and EMA touch: touching happens when the price trades at the current moving average price. For a long trade, the previous price bars should have been making lower lows as the price approached the moving average, and for a short trade, the previous price bars should have been making higher highs as the price approached the moving average. There is no specific number of bars that need to make consecutive lower lows or higher highs, but at least 3 bars are recommended.
Enter trade:
Enter your trade when the high (or low) of the first price bar that fails to make a new low (or high) is broken. The following list shows the steps required for both long and short entries:
Long Trade
- Price bars make lower lows
- Price bar touches the moving average
- Subsequent price bar fails to make a new low
- Subsequent price bar breaks the high of the previous price bar
- Price bars make higher highs
- Price bar touches the moving average
- Subsequent price bar fails to make a new high
- Subsequent price bar breaks the low of the previous price bar
Case study
In the example below, price and its EMA(34) are plotted in time frame of 1 minute bar chart.
- In the direction of yellow arrow, price and its EMA diverge.
- In the direction of red arrow, retracement causes price and its EMA converge.
- In the yellow circle, four bars consecutively make lower low toward EMA line, that is a true retracement, not the period of sideway trading.
- Two bars in the white circle touch the EMA. The price touches the EMA on the fourth bar to make a consecutive lower low.
- Subsequent price bar in white fails to make a new low, begins the break. Enter long trade whenever the next bar breaks the high of the white bar.
June 17, 2011
Volume and Buying-Selling Volume
Volume is Important.
- Volume is always a two-sided matter. There is always a buyer and a seller. When the volume equals one, it means that one seller sold one share to one buyer. If the volume equals one million, it means that a group of sellers have sold one million shares to another group of buyers. By itself, volume does not show whether traders are selling or buying, nor does it show whether there more buyers or sellers. The Volume shows the number of shares transferred from sellers to buyers.
- If the price declines, it means that sellers are willing to sell at a cheaper price than the “ask price” and that there are not enough buyers to satisfy the demand of these sellers. If the price moves up, it means that the buyers are ready to pay a higher price than the “bid price” and that there are not enough sellers to satisfy their demand.
- There are four major factors that can be obtained from volume analysis:
- Money Flow - Money Flow allows one to see whether the money is coming in or going out. Changes in the money flow allow one to spot changes in the trend.
- Accumulation - Volume allows one to see how strongly a stock, index or market is overbought or oversold by measuring the intensity of trading during the price advance or price decline. The more volume accumulated during a trend, the stronger the reversal that can be expected.
- Volume Surges and Volume Spikes - Volume allows one to spot periods of panic selling and greedy buying that are revealed through big volume surges and volume spikes. As was mentioned above, volume is always a two-sided matter. For each buyer, there is a seller and a volume surge means that a group of traders have decided to satisfy the demand of other traders.
A volume surge during a price decline revels that a group of institutional traders (who have a great deal of money) have became attracted by the low bargain price at that moment and decided to buy in large quantities from the group of panic traders who were pushing the price down. Alternatively, a volume surge during a price advance reveals that the institutional traders have decided to sell in large quantities to greedy buyers. As a rule, big volume surges lead to a shift in the supply/demand balance, followed by a trend reversal. - Liquidity – the volume allows one to see how liquid a stock or any other security is. The higher the average volume is, the more liquid the stock is and, also, the easier it is to sell or buy this stock. Such stocks as QQQQ and SPY are among the most liquid stocks in the world - they have the highest average daily trading volumes.
- Most of the volume-based technical indicators are leading indicators - indicators that predict trend reversals.
- Buying and Selling Volume: Total volume is made up of buying volume and selling volume. Buying volume is the number of contracts that were associated with buying trades, and selling volume is the number of contracts that were associated with selling trades. However, this is often confusing for new traders because every trade requires both a buyer (a trader that is buying a contract) and a seller (a trader that is selling a contract). As every trade requires that a contract is being both bought and sold at the same time, it does not seem possible that a trade could be classified as either buying volume or selling volume.
- Bid and Ask Volume: The reason that it is possible to classify a trade as either buying volume or selling volume is based upon how the trade affects the current price. Every trade occurs at a single price, and with few exceptions, that price is either the bid price or the ask price. Volume that occurs at the bid price is known as bid volume. Bid volume is selling volume because it has the potential to move the price down, due to the bid price being lower than the ask price. Conversely, volume that occurs at the ask price is known as ask volume. Ask volume is buying volume because it has the potential to move the price up, due to the ask price being higher than the bid price. Therefore, trades that occur at the bid price are considered selling volume because they help the price move down, and trades that occur at the ask price are considered buying volume because they help the price move up.
- SBV (Selling-Buying Volume) indicator helps you to define critical levels at which a trend reversal is most likely to occur. During a specified period, the SBV indicator calculates the difference between the volume production during a price (index) advance (“Buying volume”) and the volume that is generated as the price (index) moves lower (“Selling volume”).
- The SBV indicator reflects the magnitude and duration of “Selling surges” (which occur as the price / index moves down) and “Buying surges” (which are created as the price / index moves up). For instance, when the SBV indicator hits levels exceeding +33%, it reveals that the Buying volume has exceeded the Selling volume by more than 33% (the SBV indicator will be green). The opposite is true when the SBV indicator drops below a level of -33% (in this case, the SBV indicator will be red). In this particular example, the Selling volume would exceed the Buying volume by more than 33%.
- A very simple trading system can be built using the SBV indicator: Sell on Buying surges and buy on Selling surges.
June 14, 2011
20 golden keys for traders
1. Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.
2. Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.
3. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.
4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.
5. Don’t buy up into a major moving average or sell down into one. See #3.
6. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.
7. Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old traders’ wisdom is a lie. Trade in the direction of gap support whenever you can.
8. Trends test the point of last support/resistance. Enter here even if it hurts.
9. Trade with the TICK not against it. Don’t be a hero. Go with the money flow.
10. If you have to look, it isn’t there. Forget your college degree and trust your instincts.
11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.
12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don’t expect anyone to change the channel.
13. Avoid the open. They see YOU coming sucker
14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.
15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.
16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.
17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.
18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.
19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.
20. Beat the crowd in and out the door. You have to take their money before they take yours, period.
June 3, 2011
"The greatest of all gifts is the power to estimate things at their true worth."
— Francois De La Rochefoucauld
May 30, 2011
1-2-3 Patterns
A 1-2-3 set up exist in both short trending as well as long trending stock/markets. Stock/markets always move in waves (peaks and troughs). In an up trending stock/market, point one is the bottom, point two is the peak and point three is the retracement which does not go lower than point one. If the retracement moves lower than point one, then the 1-2-3 is no longer valid.
In a falling market it is the same but in reverse. Point one is the top, point two is the trough and point three is the retracement, which does not go higher than point one. If the retracement moves higher than point one, then the 1-2-3 is no longer valid.
1-2-3’s are visible in all time frames, whether on a monthly chart or a one minute chart. In order to have a valid 1-2-3, a minimum of three bars is necessary. The first two bars provide the range whilst the third bar gives the retracement and sometimes even the entry.
1-2-3’s can form over several bars as well, but as mentioned before, a minimum of three bars is always a prerequisite.
1-2-3 chart pattern is a trend reversal chart pattern indicating the reversal of an existing trend. The formation usually occurs at the end of a strong trend. 1-2-3 pattern occurs frequently in trending markets and is considered very reliable. There are bullish and bearish variations for this pattern.
1-2-3 formation starts from a big price movement in the direction of an existing trend to form a highest-high/lowest-low (point 1), then the price reverses for a correction (point 2), then again turns back to retest the support/resistance (point 3) and finally the price reverses and breaks through to start a new trend. The point 3 should not reach or exceed the point 1 level; if it reaches 1, then the pattern is not considered a valid one.
Bullish 1-2-3 chart pattern or 1-2-3 buy pattern forms at the end of an existing downtrend. The price first falls, then starts reversing, but falls again to form point 3 and then reverses and breaks free to form a new uptrend. Bearish 1 2 3 pattern or 1-2-3 sell pattern forms at the end of an existing uptrend. The price first forms a highest high, then starts falling but rises from point 3 and then reverses and breaks free to form a new downtrend.
1-2-3 chart pattern is easy to trade and supports both short-term and long-term trading. The breakout is confirmed when the price breaks the range created in between point 1 and 2. Traders can enter trades when breakout is confirmed.
December 22, 2010
Larry William’s smash day patterns
A “smash day buy setup” consists of a day that closes lower than the previous day’s low, a “naked close” is what Joe Stowell, who’s got a great eye for charts, calls these. Such days may take out the previous 3 to 8 days’ lows as well. To the chartist, the public, or professional technical analyst, this looks like a breakout to the downside, thus the extreme selling brings them to the table.
Sometimes they are right, but usually dead wrong if the market immediately reverses itself.
A smash day sell setup is just the opposite (see Figure 7.7). Here what you will be looking for is a day that closes above the prior day’s high and most likely “breaks” out to the upside to close above a trading range. This is the twitching worm that causes the public to leap before they look. The illustration shows how this usually looks. What you have here are the buy and sell setups.
As mentioned, sometimes this is a valid break. However, if the very next day price moves opposite the smash day and trades above the high of a down close smash day you have great buy signal. By the same token, a smash day up, one of those strong closes above the prior day’s high, alerts us to sell signal if the very next day price trades to the smash day’s low.
The phenomenon is that there is an immediate reversal the very next day, which means the public (sellers on the down close, buyers on the up close) are now in a world of hurt; their envisioned breakout has failed! They swallowed the hook, again, and now price responds with a reversal giving us an excellent entry. That is the pattern and the rationale, the reason it should work. I am a firm believer that when what “should happen in the market doesn’t” we have powerful evidence to take a trade in alignment with the new information.
My second smash day reversal (Figure 7.10) is a bit more difficult to identify but works on the same principle of the market not following through on one day’s action and reversing the very next day. The pattern you will be looking for, to establish a buy setup, will be a day that has an up close, not a naked down close. But, and this is the key or secret to the pattern, the day’s close will be in the lower 25 percent of the up day’s range and will also be closing below the opening of the day in the very best patterns. I call this a “hidden smash day” because of the up close.
What has happened on these days is that price has either opened much higher and then closed up for the day but way off the highs, or opened a little higher, rallied way up and then failed to hold the day’sgains. Sure, it closed up a little for the day but way below the high. The buyers got smashed, in either pattern, and chartists will now come in looking for the kill.
Only to be killed themselves-if the next day-price rallies back and takes out this smash day high. Again we see the pattern of a market failure immediately reversed the very next day. This is a most bullish set of events and calls for going long-if the stage has been set for a rally by our background tools.
A hidden smash day sell is just the opposite. Look for a down close that is in the upper 25 percent of the day’s range and above the open of the day. Our entry comes when price falls below the hidden smash day’s low the very next day indicating the rally has failed. A quick look at Figure 7.11 should establish what this pattern looks like.
from his book “Long term secrets to short term trading”
December 13, 2010
Triple Screen Trading System
from Investopedia
Part 1
Sounding more like a medical diagnostic test, the triple screen trading system was developed by Dr. Alexander Elder way back in 1985. The medical allusion is no accident: Dr. Elder worked for many years as a psychiatrist in New York before becoming involved in financial trading. Since that time, he has written dozens of articles and books, including “Trading For A Living” (1993). He has also spoken at several major conferences.
Many traders adopt a single screen or indicator that they apply to each and every trade. In principle, there is nothing wrong with adopting and adhering to a single indicator for decision making. In fact, the discipline involved in maintaining a focus on a single measure is related to the personal discipline is, perhaps, one of the main determinant of achieving success as a trader.
What if your chosen indicator is fundamentally flawed? What if conditions in the market change so that your single screen can no longer account for all of the eventualities operating outside of its measurement? The point is, because the market is very complex, even the most advanced indicators can’t work all of the time and under every market condition. For example, in a market uptrend, trend-following indicators rise and issue “buy” signals while oscillators suggest that the market is overbought and issue “sell” signals. In downtrends, trend-following indicators suggest selling short, but oscillators become oversold and issue signals to buy. In a market moving strongly higher or lower, trend-following indicators are ideal, but they are prone to rapid and abrupt changes when markets trade in ranges. Within trading ranges, oscillators are the best choice, but when the markets begin to follow a trend, oscillators issue premature signals.
To determine a balance of indicator opinion, some traders have tried to average the buy and sell signals issued by various indicators. But there is an inherent flaw to this practice. If in the calculation of the number of trend-following indicators is greater than the number of oscillators used, then the result will naturally be skewed toward a trend-following result, and vice versa.
Dr. Elder developed a system to combat the problems of simple averaging while taking advantage of the best of both trend-following and oscillator techniques. Elder’s system is meant to counteract the shortfalls of individual indicators at the same time as it serves to detect the market’s inherent complexity. Like a triple screen marker in medical science, the triple screen trading system applies not one, not two, but three unique tests, or screens, to every trading decision, which form a combination of trend-following indicators and oscillators.
The Problem of time frames
There is, however, another problem with popular trend-following indicators that must be ironed out before they can be used. The same trend-following indicator may issue conflicting signals when applied to different time frames. For example, the same indicator may point to an uptrend in a daily chart and issue a sell signal and point to a downtrend in a weekly chart. The problem is magnified even further with intraday charts. On these short-term charts, trend-following indicators may fluctuate between buy and sell signals on an hourly or even more frequent basis.
In order to combat this problem, it is helpful to divide time frames into units of five. In dividing monthly charts into weekly charts, there are 4.5 weeks to a month. Moving from weekly charts to daily charts, there are exactly five trading days per week. Progressing one level further, from daily to hourly charts, there are between five to six hours in a trading day. For day traders, hourly charts can be reduced to 10-minute charts (denominator of six) and, finally, from 10-minute charts to two-minute charts (denominator of five).
The crux of this factor of five concept is that trading decisions should be analyzed in the context of at least two time frames. If you prefer to analyze your trading decisions using weekly charts, you should also employ monthly charts. If you day-trade using 10-minute charts, you should first analyze hourly charts.
Once the trader has decided on the time frame to use under the triple screen system, he or she labels this time frame as the intermediate time frame. The long-term time frame is one order of five longer; and the short-term time frame is one order of magnitude shorter. Traders who carry their trades for several days or weeks will use daily charts as their intermediate time frames. Their long-term time frames will be weekly charts; hourly charts will be their short-term time frame. Day traders who hold their positions for less than an hour will use a 10-minute chart as their intermediate time frame, an hourly chart as their long-term time frame, and a two-minute chart as a short-term time frame.
The triple screen trading system requires that the chart for the long-term trend be examined first. This ensures that the trade follows the tide of the long-term trend while allowing for entrance into trades at times when the market moves briefly against the trend. The best buying opportunities occur when a rising market makes a briefer decline; the best shorting opportunities are indicated when a falling market rallies briefly. When the monthly trend is upward, weekly declines represent buying opportunities. Hourly rallies provide opportunities to short when the daily trend is downward.
Part 2
Market Trends
The stock market is generally thought to follow three trends, which market analysts have identified throughout history and can assume will continue in the future. These trends are as follows: the long-term trend lasting several years, the intermediate trend of several months, and the minor trend that is generally thought to be anything less than several months.
Robert Rhea, one of the market’s first technical analysts, labeled these trends as tides (long-term trends), waves (intermediate-term trends) and ripples (short-term trends). Trading in the direction of the market tide is generally the best strategy. Waves offer opportunities to get in or out of trades, and ripples should usually be ignored. While the trading environment has become more complicated since these simplified concepts were articulated in the first half of the twentieth century, their fundamental basis remains true. Traders can continue to trade on the basis of tides, waves and ripples, but the time frames to which these illustrations apply should be refined
Under the triple screen trading system, the time frame the trader wishes to target is labeled the intermediate time frame. The long-term time frame is one order of magnitude longer while the trader’s short-term time frame is one order of magnitude shorter. If your comfort zone, or your intermediate time frame, calls for holding a position for several days or weeks, then you will concern yourself with the daily charts. Your long-term time frame will be one order of magnitude longer, and you will employ the weekly charts to begin your analysis. Your short-term time frame will be defined by the hourly charts.
If you are a day trader who holds a position for a matter of minutes or hours, you can employ the same principles. The intermediate time frame may be a ten-minute chart; an hourly chart corresponds to the long-term time frame, and a two-minute chart is the short-term time frame.
First Screen of the Triple Screen Trading System: Market Tide
The triple screen trading system identifies the long-term chart, or the market tide, as the basis for making trading decision. Traders must begin by analyzing their long-term chart, which is one order of magnitude greater than the time frame that the trader plans to trade. If you would normally start by analyzing the daily charts, try to adapt your thinking to a time frame magnified by five, and embark on your trading analysis by examining the weekly charts instead.
Using trend-following indicators, you can then identify long-term trends. The long-term trend (market tide) is indicated by the slope of the weekly moving average convergence divergence (MACD) histogram, or the relationship between the two latest bars on the chart. When the slope of the MACD histogram is up, the bulls are in control, and the best trading decision is to enter into a long position. When the slope is down, the bears are in control, and you should be thinking about shorting.
Any trend-following indicator that the trader prefers can realistically be used as the first screen of the triple screen trading system. Traders have often used the directional system as the first screen; or even a less complex indicator such as the slope of a 13-week exponential moving average can be employed. Regardless of the trend-following indicator that you opt to start with, the principles are the same: ensure that you analyze the trend using the weekly charts first and then look for ticks in the daily charts that move in the same direction as the weekly trend
Of crucial importance in employing the market tide is developing your ability to identify the changing of a trend. A single uptick or a downtick of the chart (as in the example above, a single uptick or a downtick of the weekly MACD histogram) would be your means of identifying a long-term trend change. When the indicator turns up below its center line, the best market tide buy signals are given. When the indicator turns down from above its center line, the best sell signals are issued.
The model of seasons for illustrating market pricesfollows a concept developed by Martin Pring. Pring’s model hails from a time when economic activity was based on agriculture: seeds were sown in spring, the harvest took place in summer and the fall was used to prepare for the cold spell in winter. In Pring’s model, traders use these parallels by preparing to buy in spring, sell in summer, short stocks in the fall and cover short positions in the winter.
Pring’s model is applicable in the use of technical indicators. Indicator “seasons” allow you to determine exactly where you are in the market cycle and to buy when prices are low and short when they go higher. The exact season for any indicator is defined by its slope and its position above or below the center line. When the MACD histogram rises from below its center line, it is spring. When it rises above its center line, it is summer. When it falls from above its center line, it is autumn. When it falls below its center line, it is winter. Spring is the season for trading long, and fall is the best season for selling short.
Whether you prefer to illustrate your first screen of the triple screen trading system by using the ocean metaphor or the analogy of the changing of the seasons, the underlying principles remain the same.
Part 3
A trader’s chart is the foremost technical tool for making trading decisions with the triple screen trading system. For example, traders commonly use weekly moving average convergence divergence (MACD) histograms to ascertain their longer-term trend of interest. Deciding which stocks to trade on a daily basis, the trader looks for a single uptick or a downtick occurring on the weekly chart to identify a long-term change of trend. When an uptick occurs and the indicator turns up from below its center line, the best market tide buy signals are given. When the indicator turns down from above its center line, the best sell signals are issued.
By using the ocean metaphors that Robert Rhea developed, we would label the daily market activity as a wave that goes against the longer-term weekly tide. When the weekly trend is up (uptick on the weekly chart), daily declines present buying opportunities. When the weekly trend is down (downtick on the weekly chart), daily rallies indicate shorting opportunities.
Second Screen – Market Wave
Daily deviations from the longer-term weekly trend are indicated not by trend-following indicators (such as the MACD histogram), but by oscillators. By their nature, oscillators issue buy signals when the markets are in decline and sell signals when the markets are rising. The beauty of the triple screen trading system is that it allows traders to concentrate only on those daily signals that point in the direction of the weekly trend.
For example, when the weekly trend is up, the triple screen trading system considers only buy signals from daily oscillators and eliminates sell signals from the oscillators. When the weekly trend is down, triple screen ignores any buy signals from oscillators and displays only shorting signals. Four possible oscillators that can easily be incorporated into this system are force index, Elder-Ray index, stochastic and Williams %R.
Force Index
A two-day exponential moving average (EMA) of force index can be used in conjunction with the weekly MACD histogram. Indeed, the sensitivity of the two-day EMA of force index makes it most appropriate to combine with other indicators such as the MACD histogram. Specifically, when the two-day EMA of force index swings above its center line, it shows that bulls are stronger than bears. When the two-day EMA of force index falls below its center line, this indicator shows that the bears are stronger.
More specifically, traders should buy when a two-day EMA of force index turns negative during an uptrend. When the weekly MACD histogram indicates an upward trend, the best time to buy is during a momentary pullback, indicated by a negative turn of the two-day EMA of force index.
When a two-day EMA of force index turns negative during a weekly uptrend (as indicated on the weekly MACD histogram), you should place a buy order above the high price of that particular day. If the uptrend is confirmed and prices rally, you will receive a stop order on the long side. If prices decline instead, your order will not be executed; however, you can then lower your buy order so it is within one tick of the high of the latest bar. Once the short-term trend reverses and your buy stop is triggered, you can further protect yourself with another stop below the low of the trade day or of the previous day, whichever low is lower. In a strong uptrend, your protective provision will not be triggered, but your trade will be exited early if the trend proves to be weak.
The same principles apply in reverse during a weekly downtrend. Traders should sell short when a two-day EMA of force index turns positive during the weekly downtrend. You may then place your order to sell short below the low of the latest price bar.
Similar in nature to the long position described above, the short position allows you to employ protective stops to guard your profits and avoid unnecessary losses. If the two-day EMA of force index continues to rally subsequent to the placement of your sell order, you can raise your sell order daily so it is within a single tick of the latest bar’s low. When your short position is finally established by falling prices, you can then place a protective stop just above the high of the latest price bar or the previous bar if higher.
If your long or short positions have yet to be closed out, you can use a two-day EMA of force index to add to your positions. In a weekly uptrend, continue adding to longs whenever the force index turns negative; continually add to shorts in downtrends whenever the force index turns positive.
Further, the two-day EMA of force index will indicate the best time at which to close out a position. When trading on the basis of a longer-term weekly trend (as indicated by the weekly MACD histogram), the trader should exit a position only when the weekly trend changes or if there is a divergence between the two-day EMA of force index and the trend. When the divergence between two-day EMA of force index and price is bullish, a strong buy signal is issued. On this basis, a bullish divergence occurs when prices hit a new low but the force index makes a shallower bottom.
Sell signals are given by bearish divergences between two-day EMA of force index and price. A bearish divergence is realized when prices rally to a new high while the force index hits a lower secondary top.
The market wave is the second screen in the triple screen trading system, and the second screen is nicely illustrated by force index; however, others such as Elder-Ray, Stochastic, and Williams %R can also be employed as oscillators for the market wave screen.
Part 4
The triple screen trading system is based on employing the best of both the trend-following indicators and oscillators to make trading decisions. Traders are primarily concerned with any realized divergences between the readings of a longer-term trend-following indicator such as a weekly moving average convergence divergence (MACD) histogram and the relatively shorter-term reading from an oscillator such as force index, Elder-Ray, stochastic, or Williams %R.
The fourth section of this series, will examine the means by which a trader would use the Elder-Ray oscillator as the market wave, which is the second screen of the trader’s triple screen system.
Second Screen - Elder-Ray
Elder-Ray, devised by Dr. Alexander Elder, is based on the concepts of bull power and bear power, the relative strength of bulls and bears in the market. Bull power measures the ability of market bulls to push prices above the average consensus of value, which is the actual price at which a particular stock happens to be trading for a given point in time. Bear power is the bears’ ability to drive prices lower than current prices, or the current average consensus of value.
By using a longer-term trend-following indicator, perhaps a weekly MACD histogram, traders can identify the direction of the longer-term trend. Bull power and bear power are then used to find trades on the daily charts that move in the same direction as the weekly trend. The triple screen earns its “screening” label because it eliminates all signals but those in the direction of the trend: if the weekly trend is up, only buy signals are returned from Elder-Ray. If the weekly trend is down, only Elder-Ray sell signals are considered.
Buy Signals
There are two absolutely essential conditions that need to be in place for traders to consider buying: 1) the weekly trend should be up, and 2) bear power, as represented on Elder-Ray, should be negative but rising. The second condition - negative bear power - is worth exploring. The opposite condition, in which bear power is positive, occurs in a runaway uptrend, a dangerous market environment for trading despite the apparent strength of the trend. The problem with buying in a runaway uptrend is that you are betting on the greater fool theory, which states that your profit will be realized only by eventually selling to somebody willing to pay an even higher price.
When bear power is negative but rising, bears are showing a bit of strength but are beginning to slip once again. By placing a buy order above the high of the last two days, your stop order will be filled only if the rally continues. Once you have gone long, you can protect your position with a stop below the latest minor low.
Bullish divergences between bear power and price (average consensus of value) represent the strongest buy signals. If prices fall to a new low but bear power shows a higher bottom, prices are falling and bears become weaker. When bear power moves up from this second bottom, you can comfortably buy a larger number of shares than you typically would in your usual position.
You can also use Elder-Ray to determine the best time to sell your position. By tracking the pattern of peaks and valleys in bull power, you can ascertain the power of bulls. By stacking the peaks in actual price against the peaks in bull power, you can determine the strength of the uptrend - if every new peak in price comes along with a new peak in bull power, the uptrend is safe. When prices reach a new high but bull power reaches a lower peak than that of its previous rally, the bulls are losing their power and a sell signal is issued.
Shorting
Elder-Ray as the second screen in the triple screen trading system can also be used to determine the conditions in which shorting is appropriate. The two essential conditions for shorting are 1) the trend is down and 2) bull power is positive but falling.
If bull power is already negative, selling short is inappropriate because bears have control over the market bulls. If you short sell in this condition, you are effectively betting that bears have sufficient strength to push bulls even farther under water. Furthermore, as in the case discussed above, wherein the trader holds a long position during positive bear power, you are betting on the greater fool theory.
When bull power is positive but falling, the bulls have managed to grasp a bit of strength but are beginning to sink once again. If you place a short order below the low of the last two days, you receive an order execution only if the decline continues. You can then place a protective stop above the latest minor high.
Bearish divergences between bull power and prices (average consensus of value) give the strongest shorting signals. If prices hit a new high but bull power hits a lower top, the bulls are weaker than before, and the uptrend may not continue. When bull power inches down from a lower top, you can safely sell short a larger-than-usual position.
You can also determine when to cover your short positions on the basis of a reading of Elder-Ray. When your longer-term trend is down, bear power will indicate whether bears are becoming stronger or weaker. If a new low in price occurs simultaneously with a new low in bear power, the current downtrend is relatively secure.
A bullish divergence issues a signal to cover your shorts and prepare to enter into a long position. Bullish divergences occur when prices hit a new low and bear power hits an even shallower bottom, when bears are losing their momentum and prices are falling slowly.
For both long and short positions, divergences between bull power, bear power and prices indicate the best trading opportunities. In the context of the long-term trend indicated by our first market screen, Elder-Ray identifies the moment when the market’s dominant group falters below the surface of the trend.
Part 5
For the second screen of the triple screen trading system, Dr. Alexander Elder recommends the use of sophisticated and modern oscillators like force index and Elder-Ray. However, traders should not feel limited to either of these two oscillators - your favorite oscillator will probably work equally well, so you should substitute the oscillator with which you feel most comfortable. Two other oscillators that can easily be employed as the second screen are the stochastic and Williams %R oscillators.
Stochastic
Stochastic is currently one of the more popular oscillators and is included in many widely available software programs used both by individual traders and professionals. In particular, traders who employ strict computerized systems to execute their trades find that stochastic oscillators have many good qualities. For example, stochastic has an excellent track record in weeding out bad signals. More specifically, stochastic uses several steps for the express purpose of filtering out market noise, the type of ultra short-term movements that do not relate to the trader’s current trend of interest.
Similarly to Elder-Ray, stochastic identifies the precise moment at which bulls or bears are becoming stronger or weaker. Obviously, traders are best off jumping aboard the strongest train and trading with the winners while pitting themselves directly against the losers. The three types of signals important to traders using stochastic are divergences, the level of the stochastic lines and the direction of the stochastic lines.
Divergences
A bullish divergence occurs when prices hit a new low but stochastic traces a higher bottom than it did in the previous decline. This means the bears are losing their grip on the market and simple inertia is driving prices lower. A very strong buy signal is issued as soon as stochastic turns up from its second bottom. Traders are well advised to enter into a long position and place a protective stop below the latest low in the market. The strongest buy signals appear when the stochastic line’s first bottom is placed below the lower reference line and the second bottom above it.
Conversely, a bearish divergence corresponds to the circumstance in which prices rally to a new high but stochastic reaches a lower top than anytime during its previous rally. Bulls are then becoming weaker and prices are rising sluggishly. The crucial sell signal is issued when stochastic turns down from its second top. Traders should enter a short position and place a protective stop above the latest price high. The best signals to sell short occur when the first top is above the upper reference line and the second is below it, the opposite of the best signals to go long.
Level of Stochastic Lines
The level attained by the stochastic lines represents distinct overbought or oversold conditions. When stochastic rallies above the upper reference line, the market is said to be overbought and is ready to turn downwards. By contrast, the oversold condition, in which the market is ready to turn up, is represented by the stochastic falling below its lower reference line.
Traders should, however, be careful in interpreting overbought and oversold conditions using stochastic: during a longer-term trend, stochastic may issue contrary signals. In strong uptrends - as may be indicated by the trader’s first market screen - the moving average convergence divergence (MACD) histogram, stochastic becomes overbought and issues erroneous sell signals while the market rallies. In downtrends, stochastic quickly becomes oversold and gives buy signals earlier than warranted.
Although interpreting overbought and oversold conditions with stochastics can be problematic, when using the MACD histogram as the first screen of the triple screen trading system, traders can easily eliminate these incorrect signals. Traders should take buy signals from the daily stochastic only when the weekly MACD histogram shows an upward trend. When the trend is down, only sell signals from the daily stochastic should be heeded.
Using your weekly chart to identify an uptrend, wait for daily stochastic lines to cross below their lower reference line before buying. Immediately place your buy order above the high of the latest price bar. You can then protect your position with a protective stop placed below the low of the trade day or the low of the previous day, whichever is lower.
To add a further level of detail to this analysis, how the shape of stochastic’s bottom can indicate the relative strength of the rally should be discussed. If the bottom is narrow and shallow, the bears are weak and the rally is likely to be strong. If the bottom is deep and wide, the bears are strong and the rally could very well be weak.
When you identify a downtrend on your weekly chart, do not enter your trade until daily stochastic lines rally above their upper reference line. You can then immediately place an order to sell short below the low of the latest price bar. Do not, however, wait for a crossover on the stochastic lines as the market will then already likely be in a free fall. To protect your short position, place a protective stop above the high of that particular trading day or the previous day, whichever is higher.
The shape of stochastic’s top can also indicate the relative steepness or sluggishness of the market’s decline. A narrow top in the stochastic line shows the weakness of bulls and the likelihood of a severe decline. A high and wide stochastic top demonstrates the strength of bulls, and short positions should consequently be avoided.
In summary, the means by which traders can filter out most bad trades involves an intimate knowledge of overbought and oversold conditions. When stochastic is overbought, do not buy. When stochastic is oversold, do not sell short.
Stochastic Line Direction
Quite simply, when both of the stochastic lines are moving in the same direction, the short-term trend is confirmed. When prices rise along with both stochastic lines, the uptrend is most likely to continue. When prices slide along while both stochastic lines are falling, the short-term downtrend will likely continue.
When employed correctly, stochastic can be an extremely effective and useful oscillator as part of your triple screen trading system.
Part 6
In previous parts to this series on Dr. Alexander Elder’s triple screen trading system, various oscillators have been discussed in relation to the second screen of the system. Two excellent oscillators that work extremely well within the system are force index and Elder-Ray; however, any other oscillators may also be employed. Part 5 of this series described stochastic in relation to the powerful signals formed by divergences between the power of bulls and bears in the market. In this section, we’ll discuss one final oscillator that can be used as the second screen in the triple screen trading system: Williams %R.
Williams %R
The final oscillator that needs consideration in relation to its use as the second screen of the triple screen trading system is Williams %R, which is actually interpreted in similar fashion to that of stochastic. Williams %R, or Wm%R, measures the capacity of bulls and bears to close the day’s stock prices at or near the edge of the recent range. Wm%R confirms the strength of trends and warns of possible upcoming reversals.
The actual calculation of Wm%R will not be dissected in detail in this space, as its current value can be obtained through top trading software packages that are widely available today. In its calculation, Wm%R measures the placement of the latest closing price in relation to a recent high-low range. It is important to note that Wm%R requires at least a four- to five-day range of prices to work effectively with the triple screen trading system.
Wm%R expresses the distance from the highest high within its range to the lowest low in relation to a 100% scale. The distance from the latest closing price to the top of the range is expressed as a percentage of the total range. When Wm%R is equal to 0% on the 100% scale, the bulls reach the peak of their power and prices should close at the top of the range. In other words, a zero reading, plotted at the top of the chart, indicates maximum bull power. When Wm%R reads 100, the bears are at the peak of their power and they are able to close prices at the bottom of the recent range.
The high of the range is a precise measure of the maximum power of bulls during the period in question. The low of the range relates to the maximum power of bears during the period. Closing prices are especially significant in calculating Wm%R, as the daily settlement of trading accounts depends on the day’s (or week’s, or month’s) close. Wm%R provides a precise assessment of the balance of power between bulls and bears at the market close, the most crucial time for a true feel for the relative bullishness or bearishness of the market.
If we extrapolate this concept one level further, we see that Wm%R shows which group is able to close the market in its favor. If the bulls cannot quite close the market at or near the top during a market rally, the bulls are proven to be somewhat weaker than they appear. If bears cannot close the market near the lows during a bear market, they are weaker than they would appear on the surface. This situation presents a buying opportunity.
If reference lines are drawn horizontally at 10% and 90% levels, this further refines the Wm%R interpretation. When Wm% closes above its upper reference line, the bulls are strong, but the market is said to be overbought. When Wm%R closes below the lower reference line, the bears are strong but the market is oversold.
Overbought and Oversold
In an overbought condition, Wm%R rises above its upper reference line and prices close near the upper edge of their range. This may indicate a market top, and the Wm%R issues a sell signal. In an oversold condition, Wm%R falls below its lower reference line and prices close near the bottom of their range. This may indicate a market bottom, and the Wm%R issues a buy signal.
During flat trading ranges, overbought and oversold signals work very well. However, when the market enters a trend, using overbought and oversold signals may be dangerous. Wm%R can remain near the top of its range for a week or longer during a strong rally. This overbought reading may actually represent market strength rather than the erroneous shorting signal that Wm%R would issue in this circumstance. Conversely, in a strong downtrend, Wm%R can remain in oversold territory for a long period of time, thereby demonstrating weakness rather than a buying opportunity.
For these reasons, overbought and oversold readings of Wm%R should be used only after you have identified the major trend. This is where the first screen in the triple screen trading system is absolutely essential. You must use that first screen to ascertain whether you are currently embroiled in a longer-term bull or a bear market.
If your longer-term chart shows a bull market, take buy signals only from your shorter-term Wm%R, and do not enter a short position when it gives a sell signal. If your weekly chart indicates a bear market, sell short only when Wm%R gives you a sell signal, but do not go long when Wm%R becomes oversold.
Failure Swings
When Wm%R fails to rise above its upper reference line during a rally and turns down in the middle of that rally, a failure swing occurs: bulls are especially weak, and a sell signal is issued. When Wm%R stops falling in the middle of the decline, failing to reach the lower reference line and turning up instead, the opposite failure swing occurs: the bears are very weak and a buy signal is issued.
Divergences
The final important situation in reading Wm%R relates to divergences between prices and Wm%R. Divergences rarely occur, but they identify the absolute best trading opportunities. A bearish divergence occurs when Wm%R rises above its upper reference line, then falls and cannot rise above the upper line during the next rally. This shows that bulls are losing their power, that the market is likely to fall and that you should sell short and place a protective stop above the recent price high.
By contrast, a bullish divergence occurs when Wm%R falls below its lower reference line, then moves up (rallies), and cannot decline below that particular line when prices slide the next time around. In a bullish divergence, traders should go long and place a protective stop below the recent price low.
At long last, the next part of this series on the triple screen trading system will provide a discussion of the third screen in the system. The first screen of the system identifies a market tide; the second screen (the oscillator) identifies a wave that goes against the tide. The third and final screen of the triple screen system identifies the ripples in the direction of the tide. These are intraday price movements that pinpoint entry points for your buy or sell orders.
Part 7
The triple screen trading system can be nicely illustrated with an ocean metaphor. The first screen of the triple screen trading system takes a longer-term perspective and illustrates the market tide. The second screen, represented by an oscillator, identifies the medium-term wave that goes against the tide. The third screen refines the system to its shortest-term measure, identifying the ripples that move in the direction of the tide. These are the short-term intraday price movements that pinpoint entry points for your buy or sell orders during the trading day.
Fortunately, for those of us who have become weary of interpreting charts or technical indicators in the first and second screen, the third screen does not require any additional technical talent. Instead, the third screen provides us with a technique for placing stop orders, either buy stop orders or sell stop orders, depending on whether the first and second screens direct you to buy or to sell short.
More specifically, the third screen is called a trailing buy stop technique in uptrends and a trailing sell stop technique in downtrends. When the weekly trend is up (identified by the first screen) and the daily trend is down (identified by the second screen, or oscillator), placing a trailing buy stop will catch upside breakouts. When the weekly trend is down and the daily trend is up, trailing sell stops catch downside breakouts. Each situation deserves further examination.
Trailing Buy Stop Technique
When you have identified that a longer-term (weekly) trend is moving up and your medium-term (daily) oscillator declines, the triple screen trading system activates a trailing buy stop technique. To instigate the trailing buy stop technique, place a buy order one tick above the high of the previous day. Then, if prices rally, you will be stopped into a long position automatically at the time that the rally exceeds the previous day’s high. If, however, prices continue to decline, your buy stop order will not be touched.
This technique allows you to be stopped into your order if the shortest-term ripples have sufficient momentum to power the wave into the greater tide. The buy stop is therefore most closely related to what most traders would label as momentum investing. However, the use of all three screens within the triple screen trading system provides a much more detailed and refined picture of the market than the simple concept of momentum generally provides.
If you want to further refine the trailing buy stop technique, you can lower your buy order the next day to the level one tick above the latest price bar. Keep lowering your buy stop each day until stopped out (filling your order at the very best time!) or until your long-term (weekly) indicator reverses and cancels its buy signal (saving you from a loss!). The reason that the buy stop technique is prefaced by the trailing qualification relates to this fluid nature of the buy stop order. You must, however, remain vigilant in monitoring the market’s momentum, and you must be diligent in continually moving your buy stop to one tick above the latest price bar. The process can be laborious, but it will ensure that you either fill your order at the very best price or avoid a poor trade altogether if the market fails to move your way.
Trailing Sell Stop Technique
The opposite situation occurs when your long-term (weekly) trend is down, at which time you would wait for a rally in your medium-term indicator (oscillator) to activate a trailing sell stop technique. In the trailing sell stop technique, you place an order to sell short one tick below the latest bar’s low. When the market turns down, you will automatically be stopped into your short trade.
If, however, the market continues to rally, you can continue to raise your sell order on a daily basis. Opposite to the trailing buy stop technique, the trailing sell stop technique is meant to catch an intraday downside breakout from a daily uptrend. As you can see, the intraday downside breakout moves in the direction of the market tide, which in this case is a weekly downtrend.
The trailing buy stop and trailing sell stop techniques are the ultimate refinements to what is already an extremely powerful trading system within the first two screens of the three screens. Using a less developed indicator, many beginning traders will engage in a system of trailing stopped orders when they attempt to gauge market momentum. By employing a longer-term chart and a medium-term oscillator first, you can capitalize on the short-term market ripples as you make the best trades that this intraday allows.
The next section of this series will bring the triple screen trading system to a close. The journey through all three screens has been long, but the result is most definitely worthwhile. If you are able successfully to implement the triple screen trading system to its fullest, you are on your way to being ahead many other trader with whom you are competing for profits!
Part 8
At long last, we have reached the end of this series describing all facets of the triple screen trading system. You will recall that the third screen in the system, the trailing buy or sell stop system, allows for the ultimate level of precision in your buy orders or, if you are selling short, your sell orders. By identifying the ripples moving in the direction of the market tide, you will best be able to capitalize on the short-term (usually intraday) price movements that pinpoint the exact points at which you should enter your position.
Stop loss Technique
But we have yet to discuss how the triple screen trading system assists a trader, once in a position, to secure a profit and avoid significant losses. As is the case in all levels of trading, and investing at large, the decision to exit your position, whether long or short, is just as important as your decision to enter a position. The triple screen trading system ensures that you make use of the tightest stops, both in entering and in exiting your position.
Immediately after executing your purchase order for a long position, you place a stop loss order one tick below the low of the trade day or the previous day, whichever is lower. The same principle applies to a short sale. As soon as you have sold short, place a protective stop loss one tick above the high of the trade day or the previous day, whichever is highest.
In order to protect against the potential for losses, move your stop to a breakeven level as soon as the market moves in your favor. Assuming that the market continues to move you into a position of profits, you must then place another protective stop at your desired level of profits. Under this system, a 50% profit level is a valid rule of thumb for your targeted profitability.
The Importance of Stop Loss
The stop loss orders used in exiting a position are very tight under this system because of the fundamental tide of the market. If you enter into a position using the analysis tools contained in the triple screen trading system only to see the market immediately move against you, the market has likely undergone a fundamental shift in tide. Even when identifying the market’s probable long-term trend in the first screen, you can still be unlucky enough to enter your trade, for which you use the third screen, at the very moment at which the long-term trend is changing. Although the triple screen system can never identify this condition organically, the trader can prevent losses by keeping his or her stop loss extremely tight.
Even if your position enters into the red, it is always better to exit early and take your loss sooner rather than later. Realize your small loss, then sit back, and observe what is happening in the market. You will likely be able to learn something from the experience: if the market truly has shifted its long-term direction, you might better be able to identify the situation should it happen again in the future.
Conservative and Aggressive Exit Strategies
The above discussion has outlined a relatively conservative strategy for risk-averse traders. By maintaining the tightest stop loss orders possible, conservative traders can easily go long or short on the first strong signal from the triple screen trading system and stay with that position for as long as the major trend lasts. Once the trend reverses, the profits will already be locked in. If the market reverses prematurely, the trader will be stopped out of major losses.
A possibility for more aggressive, active traders is to continue watching the market after entering into a long or short position. While the longest-term trend is still valid, active traders can use each new signal from the second screen (the daily oscillator) to supplement the original position. This approach allows for a greater level of gross profit while still allowing the stop loss approach to protect the entire position. Adding to the original position while the trend continues is often referred to as pyramiding the original position.
Another type of trading is practiced by the position trader, who should try to go long or short on the very first signal issued by the triple screen system. Then he or she should stay with that position until the trend reverses.
Finally, a short-term trader may take profits using signals from the second screen. You may recall that the second screen identifies the medium-term wave that goes against the larger tide. Using the very same second screen indicator that is used prior to entering the trade, the short-term trader can use intraday occurrences of market reversals to exit the trade. If, for example, the short-term trader uses stochastic as his or her second screen oscillator, he or she may sell the entire position and take the profits when stochastic rises to 70%. The trader can then revisit the first screen of the system, reconfirm the market tide and continue to drill down to the second and third screens in order to identify another buying (or selling) opportunity.
Conclusion
The length of this eight-part series demonstrates that Dr. Alexander Elder’s triple screen trading system is not the simplest means of identifying buying and selling opportunities on the markets. The system is, however, one of the most powerful means of combining a series of useful individual indicators into one comprehensive whole. The time that you spend reading these articles and familiarizing yourself with the individual components of the system will undoubtedly pay dividends to your trading success.
December 10, 2010
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