The Triple-Screen Trading Methodology
The core concept in the triple-screen trading methodology is that – regardless of trading style or trading strategy – a trader’s primary time-frame should be supplemented by two other time-frames: a higher time-frame for determining prevailing trends (if they exist), and a lower time-frame for fine-tuning entries, trade management, and exits.
Zooming Out to a Higher Time-Frame - in order to identify an overall trend
Whether you consider yourself a trend trader, or not, you should be aware of the larger context in which your set-ups occur.
If that larger context is a trend, you need to know that.
It’s possible to trade successfully in the direction of a larger trend, if you factor that trend into your plan and your execution. And it’s possible to trade successfully against a larger trend, but only if you are aware of that trend and factor it into your timing.
On the other hand, if the larger context is a bounded price range, you need to know that, as well.
It’s a recipe for loss to attempt any trade, long or short, without knowing that price is trapped between S/R levels on the higher time-frame. On the other hand, studying the range on that higher time-frame can present opportunities to the trader who is skilled at range trading.
Zooming In to a Lower Time-Frame - for fine-tuning
The small ups and downs in price evident on lower time-frames can provide opportunities to capture more pips by improving entry prices, fine-tuning stop-loss placements, and optimizing exits. This is true whether entries, exits, stops, and limits are placed manually, or with pending orders.
So, the primary (optimum) time-frame described in the previous post is now seen as the intermediate (or middle) time-frame in a trio of three time-frames. And the question becomes: How much higher should the higher time-frame be, and how much lower should the lower time-frame be?
Opinions differ on this question. But, the most frequently stated answer is that a factor of between 4x and 6x should be used. That is, your higher time-frame should be 4 times to 6 times your intermediate time-frame, and your intermediate time-frame should be 4 times to 6 times your lower time-frame
Babypips
In the Babypips School of Pipsology, several trios of three time-frames are suggested:
- 1-minute, 5-minute, and 30-minute
- 5-minute, 30-minute, and 4-hour
- 15-minute, 1-hour, and 4-hour
- 1-hour, 4-hour, and daily
- 4-hour, daily, and weekly
Notice that all of these combinations follow the 4x-6x rule-of-thumb, with the exception of the second one, in which the 4-hour time-frame is 8 times the 30-minute time-frame.
The 4x-6x rule-of-thumb is not a hard-and-fast rule. In fact, Dr. Alexander Elder stretches it to 24x, in one case, as we will see in a moment.
Dr. Alexander Elder
As you may know, Dr. Elder is a Russian psychiatrist who jumped ship off the coast of Africa, and escaped to the U.S. He became fascinated with the psychological aspects of trading, and subsequently made trading psychology the focus of his practice. He became an accomplished trader in his own right, and went on to become a successful author and teacher on the subject of trading.
Some of you may be familiar with Elder’s first two books: Trading For A Living (Wiley, 1993) and Come Into My Trading Room (Wiley, 2002).
Dr. Elder claims to be the developer of the Triple Screen Trading System. He claims that his 1986 article in Futures magazine introduced his system to the world. His claim is probably accurate as long as “screen” – as in computer screen – is part of the claim. But, the recognition of three different time-frames on which to base trades goes all the way back to Charles Dow at the beginning of the 20th century, and Dr. Elder acknowledges this.
I’ve taken some screen-shots* of pages 235-237 from Trading For A Living, where Elder talks about his Triple Screen Trading System –
Note that on page 237, Elder gave the example of a trader who wants to hold trades for days or weeks, and he suggested that this trader would use the Daily chart as his intermediate screen (or middle screen). Let’s deconstruct that suggestion.
First, when I hear “days or weeks”, I think “anywhere between a few days and a few weeks, but not a few months”. To put numbers on it, it sounds to me like 2 to 30 days.
Let’s say that our charts are adjusted to display 200 candles, as in the USD/CAD example in the previous post. In the case of the Daily chart, we would be seeing 200 trading days of price data in one view. That equals 40 weeks (at 5 trading days per week), or about 9 months (at 22 trading days per month, on average).
So, for the trader in Elder’s example, the suggested middle screen would display between 7 times and 100 times as many days as the trader’s anticipated holding period (assumed to be 2-30 days). Compare this to the “optimum” chart size in the USD/CAD example, in the previous post.
Also, note that Elder suggests a factor of 5 times between charts, but promptly violates his own rule-of-thumb, suggesting this trio of charts: Weekly-Daily-Hourly, in which the multiple between the Daily and the Hourly is 24. As mentioned, the rule-of-thumb is not a hard-and-fast rule.
Andy Perry (Captain Currency)
Andy Perry, who posts here (and elsewhere) as Captain Currency, posted his 3 Ducks Trading System in this forum in September 2007. In addition to describing the 3 Ducks System in the first few posts of his thread, he has detailed his system in a free ebook which he published in 2007, and revised in 2012.
You can find his 3 Ducks thread here –
https://forums.babypips.com/t/the-3-ducks-trading-system/6430?
And you can find instructions for requesting a copy of his ebook in this post–
https://forums.babypips.com/t/the-3-ducks-trading-system/6430/105?
Andy’s 3 Ducks System is based on classic triple-screen trading, using the H4-H1-m5 trio of time-frames, with a 60-period simple moving average on each of the three charts. More on this trio of time-frames later in this post.
Over the past (almost) 10 years, Andy has answered numerous questions in his thread, many of them regarding how to tweak, modify, embellish, or otherwise reconfigure his elegantly simple and efficient system. The most common of those questions involve changing the time-frames, and adding indicators to the system.
I’m gong to go out on a limb here, and teach a quick lesson on how to apply Andy’s 3 Ducks Trading System. If I stray off-course, and put words into Andy’s mouth inappropriately, I trust that he will chime in and set me straight.
So - ahem - here goes:
Application #1 - trade the trend the way Andy Perry does
This is so simple – Use the time-frames Andy suggests to find intraday trend-following opportunities. If an intraday profit is all the market is willing to give you, take it. If the market is willing to give you a longer-term profit, stay in your trade (or, in a portion of it), and ride it for a multi-day, or multi-week, profit.
That’s it. Three time-frames, each with a 60-period SMA, and nothing else to clutter your charts (or your mind). Entries, exits, stops and limits chosen to suit your personal taste.
Notice that longer-term trend-following trades (up to and including swing trades and position trades) can be launched from this simple system, without stretching Andy’s recommended 4-hour time-frame to Weekly or (gasp!) Monthly.
Application #2 - use the 3 Ducks to guide your own system in the direction of the trend
As mentioned in the previous post, knowing the direction of the current trend is essential, for whatever trading system you use. If you trade your own system intraday or short-term, the 3 Ducks can be your most important “indicator”, telling you whether there is a bias in the market, and if so which way that bias is pointing. Add that information to your existing system, and you have an added edge.
But, understand that you are not trading the 3 Ducks System. You are trading some other system – your own system – and you are using the 3 Ducks’ ability to identify trends to augment your system.
Application #3 - use the 3 Ducks as a model for trend-trading on larger time-frames
The 3 Ducks Trading System was designed for trading intraday or short term. What if you want to trade longer-term? What if you don’t want to enter intraday trades hoping they will develop into swing trades or position trades? What if you consider price-action at the intraday time-scale to be essentially “noise”, and you don’t even want to look at it?
The answer is to replicate the 3 Ducks System on higher time-frames, understanding that you will not be trading the 3 Ducks, per se. You will be trading a system modeled on the 3 Ducks.
Your system might substitute the Daily chart for Andy’s 4-hour chart, and you might substitute the 4-hour chart for Andy’s 1-hour chart. Doing this changes the factor between the intermediate chart and the higher-time-frame chart from 4 (the 3 Ducks factor) to 6 (in the system you are creating). But, this difference is minor.
However, now you have to decide what to do about the lowest time-frame.
There’s a factor of 12 between Andy’s lowest time frame (m5) and his intermediate time-frame (H1). Do you want to preserve this factor, or do you want to modify it to be closer to the commonly offered rule-of-thumb, which is 4x to 6x? If you choose to use the 12x factor, then your lowest time-frame will be the 20-minute time-frame, if available; otherwise the 15-minute or 30-minute. If you choose to use the 4x to 6x rule-of-thumb, then your lowest time-frame will be the 1-hour time-frame (or the 45-minute time-frame, if your platform offers such a thing).
After you have set up your longer-term time-frames, you will add the 60-period SMA to each – and you’re now ready to trade a much slower, much longer-term replica of the 3 Ducks.
Will it work for you? That will depend largely on you. There is plenty of historical evidence to indicate that the moving averages will work as well, or better, in your larger time-frames (as in the classic 3 Ducks time-frames). But, all the other success-factors present in longer-term trading will come into play, as well – money management, trade management, patience and more patience – in determining whether you succeed.
If you have a knack for somewhat intense, online trading, it would be entirely possible for you to simultaneously trade both methodologies – the classic 3 Ducks Trading System exactly as Andy designed it, and your own longer-term replica of the 3 Ducks. Being able to do this would depend on your available screen time, and your ability to switch “hats” from intraday trading to swing (or position) trading. Not everyone can pull this off.
Answers to the fractal chart puzzle in the previous post:
- Chart #1 - EUR/NZD Daily chart
- Chart #2 - EUR/NZD 1-hour chart
- Chart #3 - EUR/NZD 5-minute chart
- Chart #4 - EUR/NZD Monthly chart
- Chart #5 - EUR/NZD 1-minute chart
(screen-shots taken shortly after 7 pm New York time, 6/28/17)
*NOTE — Regarding the screen-shots of pages 235-237, above:
I tried to upload my digital copy of Elder’s Trading For A Living, but it’s too large a file for this forum to handle as an upload. I got an error message suggesting that I upload it to a cloud file-sharing site, and then link (here in this post) to its hiding place in the cloud. But, I haven’t set up an account for file-sharing in the cloud. So, I’ve had to resort to a work-around — screen-shots.
Free gypsy downloads of both of the Elder books mentioned above are available on the internet. Wiley (Elder’s publisher) doesn’t seem very diligent about defending their copyrighted material. I’m not advocating gypsy downloads, but I am recommending both of Dr. Elder’s books for serious students.
Okay. Two “walls of text” is more than enough. I’m not up for a third.