What is meant by Fishing for Trading Systems?

The quintessential features of a trading system depend primarily upon three categories: Primary, secondary and minor. This theory was postulated by Charles Henry Dow, the founder of the Dow Jones indexes. The primary trend directs the investor towards the path where the prices are flowing. The secondary trend catapults in to the waves responsible for the flow and the minor trends is characterized by their behaviour as ripples on the waves.

The market analysis usually points out few discrepancies. This article refers to the major two discrepancies:

  1. Most of the times the investor would find interfering trend directions. This can be demonstrated by the fact that a weekly chart can show an ascending trend, although a daily chart would show a descending trend. Notwithstanding, an intraday chart would rather not reflect any direction.
  2. The signals presented by the trend indicators can also be contradictory, which means a trend indicator may point towards an ascending trend; however the oscillator may show the sell signals instead of buy signals to the trader.

According to Alexander Elder these intervals (large-time and small-time) can be divided and used appropriately to eliminate any contradictions. Dr. Elder postulated a triple screen trading system. It works better than a single screen or indicator as in a single screen trading system the investor has to adhere to a single course of action and that could eventually lead to a faulty pattern leading to losses. Instead, Dr. Elder’s system corresponds to take advantage of the best of both trend-following and oscillator techniques. With the triple trading system, one gets the opportunity to combat the shortcomings of a particular trading position along with the distinctive ramifications of the market.

The worrying factor in the trading business is the time frames.  The solution to this issue is to categorize the time frames into units of five. For example, while you deal with monthly charts, you can divide them into weekly charts, i.e. a month has 4.5 weeks. Thus, it becomes easy to move from weekly charts to daily charts, i.e. there are exactly five trading days per week. Moving further, a daily chart can be comfortably divided into hourly charts as there are five to six hours in a trading day. If you are a day trader, you can reduce the hourly chart to a 10 minute chart (denominator of six) and it can easily be converted into a two-minute chart (denominator of five).

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With the help of this categorization, a trader gets ample observational skills in terms of watching out on a monthly chart while trading on a weekly manner.

In order to implement the analysis of time frames to the concept of triple screen system, the trader has to label this time frame as the intermediate time frame. So if the investor chooses the longer- term time frame, he has to select the order of five longer. Similarly, a trader setting his time frame for a short-term has to employ the order with shorter magnitude. For a better understanding, a day trader holding a position for less than an hour, will use a 10-minute chart as his/her intermediate time frame. In fact, his long-term time frame corresponds to an hourly chart diagnosis and a two-minute chart relates to a short-term time frame.

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