As traders when we want to check a system we start taking trades when the system gives the signal. The system can be Breakouts, fakeouts, gaps, trendline breach, myriad ema cross overs or whatever. As we start taking the trades at the signal we realise that we are getting caught in the false trades. When we take a NR-x day breakout on the long side, the trade just went a few points up before collapsing into the range triggering our stops. The trendline breached in an illusory manner before breaching the other way. The EMA cross over was just a whipsaw. Irritation and frustration builds up. Then we hear the word 'Filter' whispered in our ear.
We start looking at the history of our trades and realise that if we had a filter of X points all those damned false trades which hurt our bottom line could be annihilated in one stroke!! What a discovery! We build X points as filter into our trades. As we go along we find that instead of X points X percentage is a wiser move. We pat ourselves on our back and start relaxing with our trades. As we total up our trades at the end of the month, it is interval time and SRK in the background is hamming, "Picture abhi baki hain mere dost"
Post interval we discover the darker side of the Filter's character. The under belly gets exposed. The losses making trades of the Pre-filter era are giving bigger losses and the profits of the pre-filter era have shrunk because of the filter. For those who think "filter" is used for making coffee just a little detour.
Suppose the ema cross over is the strategy. The long should have triggered at 5000. We start keeping a filter of say .2%. So instead of taking the long trade at 5000 we will take it at 5010 and if it is a short trade it is taken at 4990. For the longs if the exit was at say 5050, our profits after filter is 40 reduced by 10 because of the filter. If SL was at 4950 our losses are 60 instead of 50. Both profits have decreased and losses have increased. Double whammy. The larger the filter factor, the greater the difference. Damn!
So what do we do? Each of us have to find the balance. Do we use the filter or do we not?
I looked at my trades and concluded filters add one more complication to the strategy. One more factor to keep track of. Since I like to keep it simple I have dropped filters from my trades. In the long run I feel filters don't really make a difference. We would be naive to believe that by using filters we are escaping from the tribe of stop-hunters. All this comes with the usual disclaimer of being just an opinion.
Peter Clemenza tells Rocco in Godfather, "Leave the gun, take the cannoli". If he traded perhaps he would say, "Leave the filter, take the trade"
How do you deal with filters?
We start looking at the history of our trades and realise that if we had a filter of X points all those damned false trades which hurt our bottom line could be annihilated in one stroke!! What a discovery! We build X points as filter into our trades. As we go along we find that instead of X points X percentage is a wiser move. We pat ourselves on our back and start relaxing with our trades. As we total up our trades at the end of the month, it is interval time and SRK in the background is hamming, "Picture abhi baki hain mere dost"
Post interval we discover the darker side of the Filter's character. The under belly gets exposed. The losses making trades of the Pre-filter era are giving bigger losses and the profits of the pre-filter era have shrunk because of the filter. For those who think "filter" is used for making coffee just a little detour.
Suppose the ema cross over is the strategy. The long should have triggered at 5000. We start keeping a filter of say .2%. So instead of taking the long trade at 5000 we will take it at 5010 and if it is a short trade it is taken at 4990. For the longs if the exit was at say 5050, our profits after filter is 40 reduced by 10 because of the filter. If SL was at 4950 our losses are 60 instead of 50. Both profits have decreased and losses have increased. Double whammy. The larger the filter factor, the greater the difference. Damn!
So what do we do? Each of us have to find the balance. Do we use the filter or do we not?
I looked at my trades and concluded filters add one more complication to the strategy. One more factor to keep track of. Since I like to keep it simple I have dropped filters from my trades. In the long run I feel filters don't really make a difference. We would be naive to believe that by using filters we are escaping from the tribe of stop-hunters. All this comes with the usual disclaimer of being just an opinion.
Peter Clemenza tells Rocco in Godfather, "Leave the gun, take the cannoli". If he traded perhaps he would say, "Leave the filter, take the trade"
How do you deal with filters?
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