Chart Analysis - Triple Screen Trading System
Step 1 - Identify our trading timeframe chart
The first step in the system is to identify our trading timeframe chart. For me that is the daily chart for swing trading the stock and crypto markets, and, the 4-hour chart for intra-day trading of Forex, Commodities and Indices.
Step 2 - Identify the trade direction on the higher timeframe chart
The second step is to go one timeframe higher to identify the trade direction. That would be the weekly chart for swing trading and daily chart for intraday trading.
The higher timeframe chart will be the first screen to identify the trade direction.
The price pattern identify the trend direction. The trend is up when price makes a pattern of higher highs and higher lows. The trend is down when price makes a pattern of lower highs and lower lows. I will look for a buy setup when the trend is up and look for sell setup when the trend is down. I will stand aside when the trend direction is unclear.
The only time I may consider trading against the trend direction is when there is a divergence between price and momentum suggesting that the ongoing trend has weakened. I use the MACD to measure momentum. I will look for a buy setup when there is a bullish divergence between price and MACD. This is when price made a lower low but MACD made a higher low. I will look for a sell setup when there is a bearish divergence between price and MACD. This is when price made a higher high but MACD made a lower high.
Step 3 - Look for trade setup and entry on the trading timeframe chart
The third step is to look for a correction on the trading timeframe chart. Here I apply the stochastic oscillator and map out the support/resistance(S/R) zones to identify potential location where the correction is likely to end. Stochastic essentially measure the price position in range within our time period of interest. A reading below 20% indicates price is in the bottom range of price within the time period of interest suggesting price is oversold. A reading above 80% indicates price is in the top range of price within the time period of interest suggesting price is overbought. However, I will only take the stochastic oversold/overbought signal when price is at a S/R zone. This enhances the odd since S/R zones are where the potential supply and demand are.
The trading timeframe chart will be the second screen to identify the trade setup and location.
When the higher timeframe indicates that I should look for a buy setup, I will wait for the stochastic %K to decline below 20% and price to test a support zone. I will then place a buy limit order at the support zone.
When the higher timeframe indicates that I should look for a sell setup, I will wait for the stochastic %K to rally above 80% and price to test a resistance zone. I will then place a sell limit order at the resistance zone.
The third screen is actually the entry technique.
I use limit order to enter trade at the S/R zone after the stochastic %K has reached oversold/overbought level. I will choose to enter at a level within the S/R zone such that my initial stop is away from the S/R zone and at least 1x 14-bar Average True Range(ATR) away from my entry price. Sometimes I do go down one timeframe lower to refine my entry level.
Step 4- Identify the take profit target
If you have been following my blog, you would have noticed that all my recent trades have been identified and executed using the Triple Screen Trading system as described above.
The triple screen trading system creates a structure to my trading providing an objective method how to identify the trade direction and trade setup, when and where to enter trade, and, where to place the initial stop and take profit targets.
Do note that it is not Holy Grail. It will not work all the time as you can see from my recent trade journals. The key to make money in trading is to make more when we are right and lose less when we are wrong.
For further reading, I do suggest Dr Alexander Elder latest book "The New Trading for a Living".
Best of luck with your trading.
Disclaimer:
Trading and investment involves risk, including possible loss of principal and other losses. I shall not be responsible for any losses or loss profit resulting from trading or investment decision based on my posting and any information presented in this blog.
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