The Triple Trend Trading Technique

The Triple Trend Trading technique uses a triple screen approach to invest or trade with the trend. The ideas behind the system are inspired by Alexander Elders Come Into My Trading Room book. You can learn more about the details behind Dr Elders approach in the book as well as many other superb insights into trading psychology.

The triple screen approach  combines the best of trend following and oscillator techniques by applying them across different timeframes. The concept of multiple timeframes is crucial to understanding the triple screen.

Why timeframes are important (and a problem)

A trend following indicator often issues conflicting signals, for example a moving average may issue a buy signal on the weekly chart but a sell on the daily chart.

To resolve this problem we need to step back and analyze different timeframes with different tools. Firstly though we should break each timeframe down into approximate units of 4 to 5. Starting from the longest timeframe down to the shortest we have:

1. Monthly charts
2. Weekly charts (just over 4 weeks in most months)
3. Daily charts (normally 5 days in a trading week)
4. Hourly or 2-hourly charts (depending on length of trading day) *
5. 10-15 minute charts (4-6 of these in one hour)
6. 2-3 minute charts (5 of these per 10-15 minutes)

* 4-hourly charts may be appropriate for forex products if traded 24-hours a day

So what does this mean?

First you should decide what you trading/investment timeframe is. Then label it as your Intermediate timeframe and take the timeframes on each side for your Long- and Short-term timeframes.

For example if you want to trade only once a day, then the daily chart is your Intermediate timeframe, the weekly chart is your long-term timeframe and the hourly or 2-hourly chart is your short-term timeframe. If you are a day trader taking trades each hour then the hourly chart is your Intermediate timeframe, the daily is your long-term timeframe and the 10-minute your short-term timeframe. Long-term investors may only want to make decisions once a week, so the monthly chart is the long-term timeframe, the weekly chart is the Intermediate timeframe and the daily chart the short-term timeframe.

Screen 1 Check the trend on the Long-term chart

Establish what the long-term trend to make sure your trades or investments are in sync with this. The long-term dictates the tide of the market and it makes sense to ensure you trade or invest in accordance. You can choose your favourite trend following indicators. Options to consider are moving averages, ADX and MACD, but my preference is to combine the MACD Histogram with the Force Index .

If the MACD Histogram is rising AND the Force Index is above zero then the TREND is UP.

If the MACD Histogram is falling AND the Force Index is below zero then the TREND is DOWN.

Force Index is an indicator developed by Alexander Elder which I describe in more detail here .

Screen 2 Time entry with the Intermediate chart

In any trend there are corrections and deviations which can represent good opportunities to get on board the trend. Oscillators are particularly good tools for identifying these moments, and you should look for oversold signals in an uptrend and overbought signals in a downtrend. There are many oscillators you can use such as RSI, Stochastics, Williams %R and OBV, but my preference is to combine Bear Power / Bull Power with Force Index .

If Bear Power is below zero and rising and Force Index is below zero, we have confirmation that an oversold condition is turning back up, so it is a good time to buy the market.

If Bull Power is above zero and falling and Force Index is above zero, we have confirmation that an overbought condition is turning back down, so it is a good time to short the market.

Bear Power and Bull Power are indicator developed by Alexander Elder which I describe in more detail here and here .

Screen 3 Entering your orders with a trailing stop

Finally we have a buy or short signal identified from the second screen. However we need to hold steady as there are a few filters we can apply to get us a better price and avoid orders where the market quickly turns against us.

In an uptrend, our second screen forces us to buy after prices have gone through a short correction. However we want to be sure that the correction has finished. The technique is to use a trailing stop order as follows:

Enter a buy stop order one tick above above the previous bars high. If price rallies above the last high then our stop is activated but if it continues to fall then our stop is not triggered. If the stop is not triggered, we check whether the buy signal is still valid according to our first and second screens. If so we move the buy stop down to the new lower high so if we are stopped in on the next bar we get a better price. As long our buy signal remains valid we can lower this trailing buy stop. If the buy signal is invalidated at any point we can cancel the order and avoid a losing trade!

In a downtrend the opposite applies and we use a trailing sell stop on the low of the last bar until we are either stopped in or the signal is cancelled.

Stop Losses

Stop losses are crucial and must be used to ensure your losses remain small. In all trading and investments there will be losses and the key is to keep these small so that you can still be in the game when the big wins come. Stop losses are a flexible area and there are a variety of ways you can define these which will depend on your temperament and level of risk aversion. You can use a fixed % loss method, you can set a stop loss one tick below the previous low (in a long position) or one tick above the previous high (in a short position), or you can calculate support or resistance areas.

My preference is to use Alexander Elders Safezone method, a dynamic technique that factors in recent market noise and places stops far enough from the current market price to avoid whipsaws. The technique and formula is too complex to describe here, but is well described in Elders book Come Into My Trading Room.

The Triple Trend Trading Method

I have outlined my triple screen trading approach and through extensive testing I have refined the method into a proprietary system which I believe makes consistent profits in both bull and bear markets. In the blog I will be showing my method in action tracking and trading a variety of indexes, currencies, commodities and industry sectors. Discretionary decisions are also necessary with this method it is NOT 100% automatic. Th discretionary decisions will almost always be when deciding on stop loss levels and when to take profits need to be flexible to avoid missing out on fast moves. From time-to-time divergences will also appear which may influence me to take a larger position or a smaller position. There may also be opportunities to pyramid a move to make larger profits although this has to be carefully managed to avoid taking excessive risks. I will be using my own real money to trade so you can see in real time the success or failure of this method. To follow my trades subscribe to the Triple Trend Trading RSS feed or follow Triple Trend Trading on Twitter .

Remember that in an uptrend, our second screen should be getting us to buy after prices have gone through a short correction. We want to be sure that the correction has finished