The middle time frame, or trade management chart, is used to watch the trade throughout the life of the trade. This is the chart where you originally found the setup on and where you will always pivot from when checking another timeframe.

The higher time frame and its indicator is used to check for trends, trend reversals, and the strength of the trend. It’s always important to check the higher time frame before placing a trade because you could find that what might look like a good entry on a short trend on your middle time frame is actually a strong support on the overall uptrend on the higher time frame. That would be a very bad situation to put your money in.

The lower time frame, which is the 4H chart in this situation, is only used for maximizing profits by finding the best possible entry and exit on each trade. Because of this, it is the last screen checked prior to entry and possibly the last screen checked prior to exit. In both cases, it is used simply to maximize profits and ensure that you’re not entering at the worst possible time, like buy during an overbought signal or selling during an oversold signal.

Now, as far as setting up the indicator, I like to leave the settings alone and so does Dr. Elder. Since most traders use the default settings, then you want to be making your decisions based on what most traders will make their decisions based on; popular indicators are called self-fulfilling indicators for that reason. The lower time frame should have a quick reacting indicator, such as the Stochastic. The Stochastic reacts in real time to current price action and its algorithm uses historical data to predict levels of overbought and oversold movement. We will place the stochastic on both the 4H chart and the Daily chart. The MACD histogram will go on the Weekly chart.

Trading with the Triple Screen Method

So back to the trade you were eyeballing, which is a short entry into the USDCHF. You’ve got all three of your charts set up as described above and you’re chomping at the bit to enter the trade and seize those pips! First, you must check the trade management chart, which is the Daily timeframe with the Stochastic displayed at the bottom. The stochastic is showing a slight pullback from an overbought position of 94 a few days prior and the lines have crossed and are now retreating south. Now we check the higher timeframe. In this case, you will look to the Daily chart that displays your MACD histogram to see what it’s signaling. The MACD has previously gone through periodic showings of bullish strength, but the quick acting line has crossed south and both are inching ever closer to the neutral point of “0”. So far so good on your short position, now that you’ve confirmed sell signals using the appropriate indicators on the appropriate time frames, you just need to find an entry on the lower time frame using the stochastic we’ve placed there. This stochastic, much unlike the Daily stochastic which has been residing in the upper half of it’s possible range for quite some time now, has seen both oversold and overbought positions within recent history and is currently topping out at around 80 and looks prime for a short entry.

Since you have confirmed on all three charts that this currency pair is signaling sell, then you may enter short. There’s no exact method for calculating a stop loss or target with this strategy, but that’s where your risk management and price action analysis comes into play. What I like to do is find the nearest support and resistance levels. In this case, I find the next nearest support and place my target just before it so that price doesn’t have to break through the support in order for me to realize profit. I do the same with my stop loss and find the nearest resistance, in this case, and place my stop just above it so that price does have to break the resistance in order to trigger my stop. This gets me out of a bad trade before it runs even further against me to the next resistance. There are a number of ways to manage trades taken in this strategy. You can also use Dr. Elder’s rule of 5 here by watching the trade and if it hasn’t run profitable within 5 candles on the Daily chart, then you close the position. Dr. Elder has a theory that if your trade doesn’t run profitable within that amount of time (5 times the current time frame) then it was a bad entry or a bad trade.

Happy trading.

Andrew Marshall
Chief Compliance Officer
Fx Investment Management LLC