/Apply trend-following indicators to the long-term chart and make a
strategic decision to trade long, short, or stand aside./ The original
version of Triple Screen used the slope of the weekly MACD-Histogram as
its weekly trend-following indicator. It was very sensitive and gave
many buy and sell signals. I now prefer to use the slope of a weekly
exponential moving average as my main trend-following indicator on
long-term charts. When the weekly EMA rises, it confirms a bull move and
tells us to go long or stand aside. When it falls, it identifies a bear
move and tells us to go short or stand aside. I use a 26-week EMA, which
represents half a year of trading. You can test several different
lengths to see which tracks your market best, as you would with any
indicator.
I continue to plot weekly MACD-Histogram. When both EMA and
MACD-Histogram are in gear, they confirm a dynamic trend and encourage
you to trade larger positions. Divergences between weekly MACD-Histogram
and prices are the strongest signals in technical analysis, which
override the message of the EMA."
Notes:
You can find some information about Divergences on a web site my friend
put together with help from Loren our resident Elder/Divergence Guru. As
Elder states: "Divergences between weekly MACD-Histogram and prices are
the strongest signals in technical analysis…" I don't know if there is a
way to program an EA to recognize a Divergence but if one could do it –
it would be a very powerful indicator!
One technique I recently witnessed by another successful trader was that
he used the MACD on 2 different time frames to verify a move – he was
trading off a 15 min chart – but used the 60 min MACD to verify the
move. If the 15 minute MACD showed a sell condition he would verify that
the 60 minute also had to show the sell signal as well. This might be
something to try on the TSD – if the MACD on the Weekly and the Daily
were in agreement it would signal a stronger signal.
*_"Screen Two_*
/Return to the intermediate chart and use oscillators to look for
trading opportunities in the direction of the long term trend. /When the
weekly trend is up, wait for daily oscillators to fall, giving buy
signal. Buying dips is safer than buying the crests of waves. If an
oscillator gives a sell signal while the weekly trend is up, you may use
it to take profits on long positions but not to sell short.
When the weekly trend is down, look for daily oscillators to rise,
giving sell signals. Shorting during upwaves is safer than selling new
lows. When daily oscillators give buy signals, you may use them to take
profits on shorts but not to buy. The choice of oscillators depends on
your trading style.
/For conservative traders/, choose a relatively slow oscillator, such as
daily MACD-Histogram or Stochastic, for the second screen. When the
weekly trend is up, look for daily MACD-Histogram to fall below zero and
tick up, or for Stochastic to fall to its lower reference line, they
give sell signals.
A conservative approach works best during early stages of major moves,
when markets gather speed slowly. As the trend accelerates, pullbacks
become more shallow. To hop aboard a fast-running trend, you need faster
oscillators.
/For active traders/ use the two-day EMA of Force Index (or longer, if
that's what your research suggests for your market). When the weekly
trend is up and daily Force Index rallies above zero, it flags a buying
opportunity.
Reverse these rules for shorting in bear markets. When the weekly trend
is down and the two-day EMA of Force Index rallies above zero, it flags
a buying opportunity.
Many other indicators can work with Triple Screen. The first screen can
also use Directional System or trendlines. The second screen can use
Momentum, Relative Strength Index, Elder-ray, and others.
The second screen is where we set profit targets and stops and make a
go-no go decision about every trade after weighing the level of risk
against the potential gain.
Set the stops. A stop is a safety net, which limits the damage from any
bad trade. You have to structure your trading in such a way that no
single bad loss, or a nasty series of losses, can damage your account.
Stops are essential for success, but many traders shun them. Beginners
complain about getting whipsawed, stopped out of trades that eventually
would have made them money. Some say that putting in a stop means asking
for trouble because no matter where you put it, it will be hit.
First of all, you need to place stops where they are not likely to be
hit, outside of the range of market noise (see SafeZone* on page 173).
Second, an occasional whipsaw is the price of long-term safety. No
matter how great your analytic skills, stops are always necessary.
You should move stops only one way – in the direction of the trade. When
a trade starts moving in your favor, move your stop to a break even
level. As the move persists, continue to move your stop, protecting some
of your paper profit. A professional trader never lets a profit turn
into a loss.
A stop may never expose more that 2% of your equity to the risk of loss
(see Chapter 7, "Money Management Formulas"). If Triple Screen flags a
trade but you realize that a logical stop would risk more than 2% of
your equity, skip that trade…."
*Elder gives a formula for his SafeZone system using an Excel spread
sheet. He recommends that you program this system into your software.
*_Screen Three_*
The third screen helps us pinpoint entry points. Live data can help
savvy traders but hurt beginners who may slip into day-trading.
/Use an intraday breakout or pullback to enter trades without real-time
data/. When the first two screens give you a buy signal (the weekly is
up, but the daily is down), place a buy order at the high of the
previous day or a tick higher. A tick is the smallest price fluctuation
permitted in any market. We expect the major uptrend to reassert itself
and catch a breakout in its direction. Place a buy order, good for one
day only. If prices break out above the previous days high, you will be
stopped in automatically. You do not have to watch prices intraday; just
give your order to a broker.
When the first two screens tell you to sell short (the weekly is down,
but the daily is up), place a sell order at the previous day's low or a
tick lower. We expect the downtrend to reassert itself and catch the
downside breakout. If prices break below the previous days low, they
will trigger your entry.
Daily ranges can be very wide, and placing an order to buy at the top
can be expensive. Another option is to buy below the market. If you are
trying to buy a pullback to the EMA, calculate where that EMA is likely
to be tomorrow and place your order at that level. Alternatively, use
the SafeZone indicator (see page 173) to find how far the market is
likely to dip below its previous day's low and places your order at that
level. Reverse these approaches for shorting in downtrends.
The advantage of buying upside breakouts is that you follow an impulse
move. The disadvantage is that you buy high and your stop is far away.
The advantage of bottom fishing is that you get your goods on sale and
your stop is closer. The disadvantage is the risk of getting caught in a
down side reversal. A "breakout entry" is more reliable, but profits are
smaller; a "bottom-fishing entry" is riskier, but the profits are greater….
…If you use weeklies and dailies to get in also use them to get out.
Once a live chart gives an entry signal, avoid the temptation to exit
using intraday data. Do not forget that you entered that trade on the
basis of weekly and daily charts, expecting to hold for several days. Do
not be distracted by the intraday chop if you are trading swings that
last several days…."
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