At long last, we have reached the end of this series describing all facets of the triple screen trading system. You will recall that the third screen in the system, the trailing buy or sell stop system, allows for the ultimate level of precision in your buy orders or, if you are selling short, your sell orders. By identifying the ripples moving in the direction of the market tide, you will best be able to capitalize on the short-term (usually intraday) price movements that pinpoint the exact points at which you should enter your position. To brush up on previous sections, see Triple Screen Trading System - Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7.
Stop Loss Technique
But we have yet to discuss how the triple screen trading system assists a trader, once in a position, to secure a profit and avoid significant losses. As is the case in all levels of trading, and investing at large, the decision to exit your position, whether long or short, is just as important as your decision to enter a position. The triple screen trading system ensures that you make use of the tightest stops, both in entering and in exiting your position.
Immediately after executing your purchase order for a long position, you place a stop loss order one tick below the low of the trade day or the previous day, whichever is lower. The same principle applies to a short sale. As soon as you have sold short, place a protective stop loss one tick above the high of the trade day or the previous day, whichever is highest.
In order to protect against the potential for losses, move your stop to a breakeven level as soon as the market moves in your favor. Assuming that the market continues to move you into a position of profits, you must then place another protective stop at your desired level of profits. Under this system, a 50% profit level is a valid rule of thumb for your targeted profitability.
The Importance of Stop Loss
The stop loss orders used in exiting a position are very tight under this system because of the fundamental tide of the market. If you enter into a position using the analysis tools contained in the triple screen trading system only to see the market immediately move against you, the market has likely undergone a fundamental shift in tide. Even when identifying the market's probable long-term trend in the first screen, you can still be unlucky enough to enter your trade, for which you use the third screen, at the very moment at which the long-term trend is changing. Although the triple screen system can never identify this condition organically, the trader can prevent losses by keeping his or her stop loss extremely tight.
Even if your position enters into the red, it is always better to exit early and take your loss sooner rather than later. Realize your small loss, then sit back, and observe what is happening in the market. You will likely be able to learn something from the experience: if the market truly has shifted its long-term direction, you might better be able to identify the situation should it happen again in the future.
Conservative and Aggressive Exit Strategies
The above discussion has outlined a relatively conservative strategy for risk-averse traders. By maintaining the tightest stop loss orders possible, conservative traders can easily go long or short on the first strong signal from the triple screen trading system and stay with that position for as long as the major trend lasts. Once the trend reverses, the profits will already be locked in. If the market reverses prematurely, the trader will be stopped out of major losses.
A possibility for more aggressive, active traders is to continue watching the market after entering into a long or short position. While the longest-term trend is still valid, active traders can use each new signal from the second screen (the daily oscillator) to supplement the original position. This approach allows for a greater level of gross profit while still allowing the stop loss approach to protect the entire position. Adding to the original position while the trend continues is often referred to as pyramiding the original position.
Another type of trading is practiced by the position trader, who should try to go long or short on the very first signal issued by the triple screen system. Then he or she should stay with that position until the trend reverses.
Finally, a short-term trader may take profits using signals from the second screen. You may recall that the second screen identifies the medium-term wave that goes against the larger tide. Using the very same second screen indicator that is used prior to entering the trade, the short-term trader can use intraday occurrences of market reversals to exit the trade. If, for example, the short-term trader uses stochastic as his or her second screen oscillator, he or she may sell the entire position and take the profits when stochastic rises to 70%. The trader can then revisit the first screen of the system, reconfirm the market tide and continue to drill down to the second and third screens in order to identify another buying (or selling) opportunity.
The length of this eight-part series demonstrates that Dr. Alexander Elder's triple screen trading system is not the simplest means of identifying buying and selling opportunities on the markets. The system is, however, one of the most powerful means of combining a series of useful individual indicators into one comprehensive whole. The time that you spend reading these articles and familiarizing yourself with the individual components of the system will undoubtedly pay dividends to your trading success.