Once new traders reach a certain level of proficiency in market analysis and trade execution the majority of their trading mistakes generally fall into two categories: trading psychology and trend-relativity errors. The first is an issue of self-control. The latter refers to an equally common problem: often a trade will look beautiful on one chart (in one time frame), but ill-advised at best on another chart (another time frame).

A market that looks like it is beginning an uptrend in the daily time frame, for example, may be only pulling back into resistance on the weekly chart, where the momentum and trend are down. The problem is magnified even further with intraday charts, where trends in multiple time frames often conflict with each other.

To combat this problem, trader and trading coach Alexander Elder invented the Triple Screen System, which he outlined in his now-classic book Trading for a Living. (Buy it. Read it. Study it.) The idea of the Triple Screen Trading System is based on the concept that the market moves in waves of energy, and every larger wave consists of smaller ones, which themselves consist of even smaller waves. To trade successfully a trader should choose to enter the market the moment when the waves are all moving in the same direction. This is when all of the market energy is aligned, and your chances of success are much greater.

If you are trading the daily chart, for example, you don't want to consider only the daily chart, because you would only be getting a limited picture of what is going on with that market. You need to study the weekly chart also. And you need to study the hourly chart when the daily chart indicates it might be time to enter or exit the trade, or you risk a greater chance of being stopped out with a loss.

The triple screen trading system requires that the chart for the long-term trend be examined first. This ensures that the trade follows the tide of the long-term trend while allowing for entrance into trades at times when the market moves briefly against the trend. The best buying opportunities occur when a rising market makes a brief decline; the best shorting opportunities are found when a falling market rallies. When the monthly trend is upward, weekly declines represent buying opportunities. Hourly rallies provide opportunities to short when the daily trend is downward.

First Screen - Market Tide

The first screen is the highest time frame you will use. Most stock swing traders use the daily chart to find trades. In their case, the weekly chart would serve as the first screen. The first screen sets the overall market direction, or trend. The market tide, if you will. Always swim with the tide. Experienced surfers will tell you you'll catch better waves when surfing with the tide.

Second Screen - Market Wave

For most traders the daily chart would serve as the second screen. The idea is generally to catch a ride on any wave in this time frame when it moves in the direction of the tide, or weekly trend. Your chances of catching a nice, long and smooth ride under these conditions are much more favorable than if you are swimming against the greater tide.

Third Screen - Market Ripples

This time frame identifies the short-term frame and is used primarily for executing entries and exits. This allows you to enter with more precision, enabling you to use tighter stops, while increasing the chance that the trade will move immediately in your favor.

Markets cycle through the same technical patterns in virtually every time frame, whether a monthly chart or a 1-minute chart. You can use these patterns or indicators on the third screen to execute trades that look good on the second screen (and are aligned, of course, with the trend on the first screen).

Elder recommends using time frames that are roughly 5 times higher than the time frames below it. The hourly time frame generally works for the daily chart, and the daily chart for the weekly. For intraday charts, for example, one might use the one-minute, five-minute and 30-minute charts. For charts of FX pairs which trade 24-hours a day, four-hour charts are commonly used to execute trades made from the daily chart.

Let's look at an example using the GBP/JPY pair. This pair began a strong weekly downtrend in August and then pulled back into its 21-ema on the daily chart in October. At this point, having noted the weekly downtrend, we would be looking to short any rallies on the daily chart, that is any moves against the prevailing tide. When the daily chart reaches the area where we think resistance would be found, we turn to the 4-hour chart to look for a reversal in that time frame and to enter our short position.

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