Alexander Elder's Triple Screen Trading System is a vivid example of mechanical trading systems.
Alexander Elder's Triple Screen Trading System
The idea of the Triple Screen Trading System is based on the concept that the market is moving in waves just like waves in the ocean. Every powerful wave consists of smaller ones, which consist of even smaller waves. To trade successfully a trader should choose the moment when waves are moving in the same direction to enter the market.
First Screen - Market Tide
It identifies the long-term trend (e.g. on the weekly chart).
The main trend is identified on the basis of the weekly chart and MACD histogram. When histogram is down it is better to open short positions. The selling signal will be stronger when the histogram is below zero. When the histogram is up the best decision is to enter into a long position. Long position opening will be more effective in case the histogram is above zero. The tendency on the first screen is like a tide. And it is better not to swim against the tide.
Second Screen – Market Wave
It identifies the mid-term trend (e.g. on the daily chart).
The mid-term trend is indicated with the help of oscillators, such as stochastic, RSI and other indicators created on the daily chart. If the first screen points at the bullish market and oscillators are in the oversold area this is a good signal to buy. And vice versa on the weekly bearish trend when the oscillators are overbought on the daily chart there is a good chance to sell. Waves are signals of the second screen. The Triple Screen Trading System considers only the waves which do not contradict the tide.
Third Screen
It identifies short-term trend, fixing breakouts of highs and lows of the previous day.
If price reaches a new high comparing with the previous day, weekly trend increases and daily oscillators fall to the oversold area buy signal forms. If price reaches a new low comparing with the previous day, weekly trend is falling and daily oscillators rise to the overbought area it is high time to sell. The third screen identifies the ripple of the market.
Elder Ray Indicator
Elder Ray Indicator is an additional instrument of the Triple Screen Trading System. Its aim is to measure bullish and bearish force at every moment of time.
The calculation is based on the following principles:
- Price is an agreement between sellers, buyers and square traders.
- The Moving Average is the averaged price agreement.
- The highest price is the maximum of the bullish force over a specified period of time.
- The lowest price is the maximum of the bearish force over a specified period of time.
Elder Ray consists of three horizontal screens:
- The first chart is a chart with a 13-period exponential moving average. When the moving average rises there is a bullish trend. When the moving average falls there is a bearish trend.
- The second chart is a chart with a histogram of the Bullish Force. Bullish Force is calculated as follows:
Bulls Power = High — EMA, where:
High — the maximum price over the period;
EMA — exponential moving average.
If the price top is higher than the moving average, then the Bullish Force is above zero, so the bullish trend is confirmed. Otherwise, bulls are weak.
- The third chart is a chart with a histogram of the Bearish Force:
Rears Power = Low — EMA, where Low — the minimum price over the period.
If the price low is below the moving average this means that the downtrend is very strong. Otherwise, bears are weak.
Elder Ray Main Signals
- Buy Signals. Moving average rises and Bullish Force indicator is below zero. The best time to buy is when the Bearish Force first falls below zero and then immediately rises. If new price highs are confirmed by new Bullish Force indicator highs, then it is a good confirmation of the bullish trend. Bearish convergence is another strong signal.
- Sell Signals. Moving average moves downward and Bullish Force is above zero. Bearish trend is confirmed if the price lows and Bearish Force indicator lows move downward in parallel. Bullish divergence is another strong signal.
