My thoughts on Filters:
Filter calculation cannot be arbitrary. You should look at all the failed trades and check their MFE (Max Favourable Excursion). That may give you an idea of the optimum filter that can be used.
Using filters is a double-edged sword. Let me give an example.
Say you have a 1000/- stock and you use a filter of Rs.3/-. You will be using this filter for both entry and exit, I assume. You will buy if it touches 1003 if 1000 is the high of the setup candle. If the low of the setup candle is, say, 990 then you will exit if it touched 987. By adding the filter, you have increased the risk to 16 points. If your intention is to book at say 2%. You will exit at 1023. If your win-loss ratio is 40-60, then you make 40*20=800 points on the winning trades. On the losing trades, you give up, 60*16=960. You end up with a net loss of 160 points. If your win-loss ratio is 50-50, then wins are 50*20=1000 points and losses are 50*16=800.
Recalculate the same without a filter. Win-loss ratio of 40-60 - Wins 40*20=800, losses 60*10=600. Win-loss ratio 50-50 - Wins 50*20=1000, losses 50*10=500. In both cases you will see that you are better off without filters.
In most good systems, losing trades are more than the winning trades but the winning margin being higher makes up for the losing trades. When you have a greater number of losing trades having a filter increases the loses in the losing trades and decreases the wins in the winning trades.
So while the idea of the filter is appealing when we see false breakouts, it may not be so appealing on a large number of trades in the long run.
Filter calculation cannot be arbitrary. You should look at all the failed trades and check their MFE (Max Favourable Excursion). That may give you an idea of the optimum filter that can be used.
Using filters is a double-edged sword. Let me give an example.
Say you have a 1000/- stock and you use a filter of Rs.3/-. You will be using this filter for both entry and exit, I assume. You will buy if it touches 1003 if 1000 is the high of the setup candle. If the low of the setup candle is, say, 990 then you will exit if it touched 987. By adding the filter, you have increased the risk to 16 points. If your intention is to book at say 2%. You will exit at 1023. If your win-loss ratio is 40-60, then you make 40*20=800 points on the winning trades. On the losing trades, you give up, 60*16=960. You end up with a net loss of 160 points. If your win-loss ratio is 50-50, then wins are 50*20=1000 points and losses are 50*16=800.
Recalculate the same without a filter. Win-loss ratio of 40-60 - Wins 40*20=800, losses 60*10=600. Win-loss ratio 50-50 - Wins 50*20=1000, losses 50*10=500. In both cases you will see that you are better off without filters.
In most good systems, losing trades are more than the winning trades but the winning margin being higher makes up for the losing trades. When you have a greater number of losing trades having a filter increases the loses in the losing trades and decreases the wins in the winning trades.
So while the idea of the filter is appealing when we see false breakouts, it may not be so appealing on a large number of trades in the long run.
In my backtesting of this and several systems, I have noted that an entry filter saves us from false breakouts. I don't use exit filters when trading intraday. The reason is if the entry triggered with a filter and is reversing below, it is already whipping and going out of my comfort zone. The best trades in this system are pretty much unidirectional. Anything else is just noise.
The logic of using filters is that such filters help us stay out of a lot of trades that clip our entry and immediately turn. My premise is to find trades that run 2x,4x,6x from our entry. And in such cases an additional filter lower returns only partially, but has an effect on the Win:Loss Ratio.
Having said that, I do believe that over 10,000 trades having a filter or not having a filter would likely lead you to the same result. Law of Large numbers will likely make it immaterial. But when developing a system, it is easier to give up if you see a few false breakouts rather than more trades with lower returns. If both give me similar returns, I would trade one that keeps me more at peace while I'm in trades.