Triple Screen Trading System (Part 3)

The third part of Dr. Alexander Elder's Triple Screen Trading System discusses the Third Screen, which focuses on using the Stochastic indicator to determine entry and exit signals in forex trading. The Third Screen serves to confirm signals from the Second Screen using a smaller time frame.

Third Screen in Triple Screen: Depicting the "Market Ripple"

1. Concept of the Third Screen: Market Ripple On the Third Screen, you analyze a smaller time frame to find more accurate trading signals based on the signals generated from the Second Screen. This short-term time frame is used to find the precise moments to open or close positions.

Main Indicator: Stochastic Oscillator (9,3,3 or 14,3,3)

Stochastic Oscillator: The Stochastic Oscillator is a popular and effective oscillator indicator for analyzing market momentum. There are three main ways to use the Stochastic in trading:

1. Observing Divergence
2. Analyzing Overbought and Oversold Levels
3. Noticing the Direction of the Stochastic Lines

2. How to Use the Stochastic Indicator on the Third Screen

A. Divergence

• Description: Divergence occurs when price movements and the Stochastic indicator do not align, often indicating potential trend reversals.
• Bullish Divergence: Occurs when price forms lower lows but the Stochastic forms higher lows, indicating a potential trend change from bearish to bullish.
• Bearish Divergence: Occurs when price forms higher highs but the Stochastic forms lower highs, indicating a potential trend change from bullish to bearish.

Trading Strategy with Divergence:

Action	Detail
Bullish Divergence	Entry buy when Stochastic shows bullish divergence on 4H.
Bearish Divergence	Entry sell when Stochastic shows bearish divergence on 4H.

B. Overbought and Oversold Levels

• Description: Overbought and oversold levels are indicators to determine overbought or oversold market conditions.
• Overbought: If the Stochastic lines are above the 80 level, the market is considered overbought.
• Sell Signal: When the %K line crosses the %D line from above.
• Oversold: If the Stochastic lines are below the 20 level, the market is considered oversold.
• Buy Signal: When the %K line crosses the %D line from below.

Trading Strategy with Overbought and Oversold Levels:

Action	Detail
Buy	If Stochastic is below 20 (oversold) and %K crosses %D from below.
Sell	If Stochastic is above 80 (overbought) and %K crosses %D from above.

C. Direction of Stochastic Lines

• Description: The direction of the %K and %D lines can provide additional signals about market trend direction.
• Upward Direction: If the %K and %D lines are moving upwards.
• Buy Signal: Indicates strength in an uptrend.
• Downward Direction: If the %K and %D lines are moving downwards.
• Sell Signal: Indicates strength in a downtrend.

Trading Strategy with the Direction of Stochastic Lines:

Action	Detail
Buy	If %K and %D are both moving upwards.
Sell	If %K and %D are both moving downwards.

3. Example Application of the Stochastic Indicator on the Third Screen

Below is an example of applying the Stochastic (9,3,3) on the Third Screen with a 5-day and 4H time frame for EUR/USD.

Example 1: Bullish Trend (March 2009 - October 2009)

• First Screen (Weekly): Bullish trend.
• Second Screen (Daily): Stochastic shows oversold condition and %K crosses %D from below.
• Third Screen (4H): Entry buy when the Stochastic lines are above the 20 level and both %K and %D are moving upwards.

Entry and Exit Strategy:

Action	Detail
Entry	Buy when Stochastic on the 5-day shows oversold condition with a buy signal on 4H.
Stop Loss	Below the low of the current or previous day.
Take Profit	When Stochastic shows overbought condition on 4H or bearish divergence occurs.

Example 2: Bearish Trend (December 2009 - May 2010)

• First Screen (Weekly): Bearish trend.
• Second Screen (Daily): Stochastic shows bearish divergence.
• Third Screen (4H): Entry sell when bearish divergence occurs with a sell signal on 4H.

Entry and Exit Strategy:

Action	Detail
Entry	Sell when Stochastic on the 5-day shows bearish divergence with a sell signal on 4H.
Stop Loss	Above the high of the current or previous day.
Take Profit	When Stochastic shows oversold condition on 4H or bullish divergence occurs.

4. Tips and Best Practices

1. Consistency in Time Frames
• Follow the time frame rules to ensure signal consistency between the Second and Third Screens.
2. Combination of Indicator Analysis
• Use multiple methods within the Stochastic to enhance the validity of trading signals.
3. Evaluate Divergence
• Pay attention to divergence to identify potential trend changes that can provide strong trading signals.
4. Risk Management
• Clearly set stop loss and take profit levels, and always manage risk in trading.

The Third Screen of the Triple Screen system utilizes the Stochastic Oscillator to determine entry and exit signals on a smaller time frame. By leveraging divergence techniques, overbought and oversold levels, and the direction of the Stochastic lines, traders can confirm signals from the Second Screen and improve the accuracy of trading decisions.

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