The third touch (also known as the third strike) trading strategy is another strategy that we are going to introduce to our traders.
Triple Screen Trading System
Beginners often look for a magic tool, a single indicator that will help them earn piles of money. If they get lucky for a while, they think that they’ve discovered the road to Eldorado. But when the magic dies and these amateurs start losing money, they give up on their old indicator and start hunting for another goldmine. Well, we won’t discover America, if we tell you that it’s a wrong approach to trading. The markets are too complex to be analyzed with a single indicator. And as soon as you read the latter sentence you will probably say: “Well, OK, I tried to use different indicators, but they give me contradictory signals”. And you will be absolutely right; indicators like wrangling with each other and give traders false signals.
To help you cope with this confusing situation, Alexander Elder, one of the brightest men of traders’ society, invented a so-called triple screen trading system. It combines trend-following indicators with oscillators and filters out their disadvantages while preserving their strengths. What a genius solution!
Like a triple screen marker in medical science (before getting involved in financial trading, Elder worked as a psychiatrist, by the way), the triple screen trading system applies several unique tests, or screens, to every trading decision. Thereby it minimizes your risks and offers you bigger profits.
How does this system work?
Firstly, you should decide which timeframe you want to trade. There are three main trends – long-term, intermediate and minor. Robert Rhea, the prominent market technician of the 1930s, compared these market trends to a tide, a wave, and a ripple accordingly. He believed that traders have to trade in the direction of the market tide (which could be identified on the first screen, i.e. on the largest time frame), take advantage of the waves (which indicate intermediate changes in trading patterns) and keep an eye on the ripples (don’t ignore the minor trade signals displayed on the third screen).
For example, if you want to trade for several days, then your intermediate timeframe will be defined by the daily charts. Weekly charts will help you to determine long-lasting trends (tides), and hourly charts will let you find the best moment to open your trade. You will find the possible combinations of timeframes you can you in the table below.
Once you chose your timeframes, you can plunge into unraveling the trade patterns. Start with analyzing the long-term chart to define the dominant trend. Use a trend-following indicator - 13-period exponential moving average (click 'Insert' - 'Indicators' - 'Trend' - 'Moving Average'). If the line goes down, it's a downtrend. If it's rising, it's an uptrend. You can also add MACD (click 'Insert' - 'Indicators' - 'Oscillators' - 'MACD') for confirmation. Look at the slope of MACD-Histogram. When the columns are rising, bulls control the market. And, conversely, when the slope is down, it indicates a downtrend.
Remember the important rule: during an uptrend, you open only BUY trades; during a downtrend, you open only SELL trades.
The second screen/second timeframe helps us identify the waves that go against the tide. To put in simple terms, if the weekly trend goes down, you need a correction up on the daily chart and catch the moment when this correction finishes and the overall downtrend resumes.
Here use oscillators to define the deviations from the weekly trend. Your task is to find only those daily signals that point in the direction of the dominant weekly trend.
For example, if the weekly trend is negative, you should take into consideration only sell signals from daily oscillators and ignore their buy signals. To do so you can use the Stochastic Oscillator. When weekly 13 EMA and MACD fall, look for a moment when the daily Stochastic Oscillator leaves the overbought area and starts declining below 70. This will be a sell signal. Alternatively, when the weekly MACD rises, look for the situation when the daily Stochastic exits the oversold area and rises above 30. This will be a buy signal.
The third screen is used to pinpoint entry points. The third screen doesn’t require any technical tools. It helps to enter the market once the first and second screens gave a signal to buy or sell. To make your entry as precise as possible, use the so-called trailing technique.
When the weekly trend is down and the daily trend turns from uptrend to downtrend, you go to your third screen/timeframe. When you open the third chart, you don't enter the market immediately but use a pending order. Place a Sell Stop order 1-2 pips below the low of the previous candlestick. This will help you catch a breakout to the downside. Plus if the market changes direction before you open our trade, you will be safe from a bad trade. If the pair went up without touching your order (the SELL position didn't open), move your Sell Stop to 1-2 pips below the next candlestick. When your trade finally opens, place a Stop Loss 1-2 pips above the high of the last 2 candles. Have a look at the picture below to see how it all works.
The same tactics but with the opposite actions should be applied when the dominant trend is rising. By using the Elder’s strategy described in this article, you will be well-protected from the risks of losing money (the risk of being deceived by the false trading signals) and, at the same time, you will be able to earn more (with help of indicators and oscillators you won’t miss your profits).
Today we are going to explain another strategy, which fits for the trading of majors.
One stochastic oscillator is always good to consider during the trading day. But what do you think about two stochastic oscillators?