Picture Credit: Gabriel M.
As the saying goes, “trend is your friend”. It does not pay to go against the trend, especially the bigger ones. What do I mean by bigger trends? Bigger trends are trends that are only visible at longer time frame. For example, if you are trading using a day chart, a bigger trend can be identified from a weekly chart. If you are trading an hourly chart, a bigger trend can be identified on a daily chart.
Dr Alexander Elder developed a triple trading screen to catch such trends and align his entries to them. Here is a brief explanation on how the triple trading screen works:
1) Market Tide
The first screen is known as the identification of the market tide. It is important only to trade in the direction or trend of the tide. If it shows an uptrend, only take buy signals and ignore sell signals. The trend can be determined using trend indicators like EMA and MACD. A factor of 5 has to be applied to your trading time frame. If your trading time frame is daily, then 5 x daily = weekly. Hence, identify the market tide on a weekly chart with EMAs, MACD or your favourite trend indicators.
2) Market Wave
A wave is a subset of the tide. In a tide, waves go up and down, to and fro. But the stronger one is in the same direction as the tide. Hence, you would want to sail in the direction of the stronger waves. Translating to trading, if the weekly chart is an uptrend, it is important to look for ONLY buy signals from your day chart. There are bound to be sell signals, but these are usually small price retracements and will be overwhelmed by the stronger waves (buy signals).
Usually, market waves are determined by oscillators. Alexander recommends his proprietary Force Index, Elder-Ray and the common ones like stochastic.
3) Intraday Breakout
Alexander prefers to use intraday price action to determine the entry point. He looks for divergence in price action with the market tide which means, if the weekly trend is up, the market wave says buy, the entry point is when the daily trend is down. At this point, you may be thinking it’s rather conflicting, “I thought the trend must be the same for daily and weekly so as to go with the trend?” If you read carefully, he is still going with the weekly trend (uptrend) by BUYING. The reason he chooses to buy only when the daily trend is down because he would catch a bigger upside and increase his profits. There is some form of mean reversion perspective in a divergence trade.
The triple trading screen can be used as a trading system by itself, hence you may want to read and research further before adopting it for use. The purpose of sharing the triple trading screen is to show the usefulness of always seeing a bigger picture than your trading time frame, and from the process of knowing the bigger trend, improves the reliability of your entries.
