All language subtitles for 7. Filter Approach To False Trendline Breaks

Another stretch can use to test to see if something is a false breakout is breaking through a trend

line is to apply a filter and we can use filters and lots of different types of indicators.

But we're going to talk about applying a filter in a trend line and specifically applying something

when trend lines are broken in terms of, you know, trading mechanisms.

So let's talk about that.

So at its base level, a filter is simply a modification of any trading indicator.

And basically you're setting a predetermined rule on an action that you'll take when certain conditions

are met.

All right.

So that's is the key thing.

It is predetermined.

You've already decided that when this happens, you know, then you will do you know, then you will

take a certain amount of action.

And we're talking about this with specifically with trend lines.

But you can use filters with different types of indicators as well, and some work better than others

when we give them the lessons around, you know, more detail filters with other types of indicators.

But in this case, we're looking for a trend line breakage, right where you filter a predetermined

rule that when a trend line is broken, we can modify the the clear rule whether to buy or sell by adjusting

it with a filter.

And we can then filter it can be an amount or a percentage of the break.

So we need to break by a certain percentage before we'll take action.

That simply Breaking Bad has to do so by a significant or certain amount of percentage breakage or duration

or time of the break.

How many, let's say time periods, maybe be a day or days after before I take action.

So I'm not taking action immediately.

I might be taking action because I've modified my indicator to kind of be out there a little bit more

in terms of time.

And the key part, again, of all this with filter conditions is they need to be met in order to take

action.

You predetermine this and you said, OK, I'm going to do this, I'm going to follow this plan is the

idea.

So let's look at an example, though, really kind of bring this home.

So let's say you're you know, we know the support line exit roll, right?

So you're selling you've bought into an upward trend and you're going to sell out of that trend as soon

as possible after the low falls below the support line, the low any time in that low price range during

the day, the support line is broken, the trend is broken.

You're selling.

That's the rule, right?

That's the rule.

Now, let's modify or filter this rule is another way you could approach it.

So you're not selling exactly the point.

You're trying to, you know, give yourself a little bit more to see if it might be a false or temporary

breakup.

So ways you could do that is say, OK, I know the support line rule says I should sell it since it

breaks the line breaks that support line.

But I'm going to have an amount type rule and might be like something like, you know, once the price

range I'm going to set a price range has to break the support line by 10 percent, then I will sell,

you know, so it's that simple enough that it breaks it.

It's got to do a significant if by 10 percent or I might say not only of the range, I might say, well,

the clothes, the actual final close has the breaks, the support line.

And that has to not only break this far along, but that needs to do it by, let's say, five percent.

Then I will sell, by the way, these numbers.

Ten percent, five percent.

Those are not etched in stone.

You can use your own numbers and you'll want to as you learn your securities or maybe the securities

you're trading, you might make those numbers lower or higher, depending on your risk level, on how

much profit you want to book, but also like some trait that some some securities have wider ranges

of of of trading.

And so five percent or 10 percent might be too low.

Maybe you want to make that even steeper or vice versa.

So you may make that two percent and four percent or whatever you can you could pick one or both either

way.

But the idea is you're picking an amount of the price range has to support by in order for you to take

action.

In this case, we're looking at breaking a support line to sell.

So in this case, we would sell you could also use a duration type of role, too, as a filter.

And for example, you'd say, I will allow one full brake of the support line, but not two.

So that means if it breaks the support line, you know, on one day, let's say we're trading on a day

and like, OK, it broke the support line, the support line exit rules.

I'm supposed to sell us past cell as soon as possible.

So I should be selling now.

But I'm going to set up a filter and a rule and say I'm going to wait until it breaks it twice, you

know, and if it doesn't break it twice, you know, right there in the following day, then stick it

in there.

So that's idea of making these a little bit more filtered out.

And again, these are examples, you know, adjust your own securities and you gain experience and what

you feel comfortable with, too.

But the idea is I'm not following the hard and fast rule of the line was I sell I'm putting some filters

or modifiers to it to allow me to stay in a little bit longer, put a little bit more at risk, because

I'm taking a lot more risk around that rule.

But I'm also trying to filter out a false breakout is what I'm trying to do here.

So if we look at this example here, you know, the same example, we could see that, you know, OK,

we bought in on the second touch.

We're in a nice uptrend here.

You could see that when it breaks the line there, right at Ali there.

We should have been selling right away.

If we followed the rule to the letter, it broke the line we should have sold.

But let's say we had a.

Culture that said, we have to not only break it, but it's going to break it by 10 percent, we would

say at the letter E estimate here this example, but we say, OK, we're not going to sell here because

it didn't break the line by more by more than 10 percent.

Right.

So it didn't break the line by more than 10 percent.

It's we're not saying because it's less than 10 percent really is a way to look at.

So it's no sell.

The break is less than 10 percent is no sell.

Now, if we look to be you know, now that's broken.

Percelay on a second day or stayed below that line, we can say, oh, we're going to sell because the

clothes of that day is greater than five percent breakage through that line.

Now we've broken through the line, but the actual closing of the day, that was our second example.

Now we're selling because it broke through.

And then if we were applying C, we would say, OK, we're not going to sell on the first full day because

that's B so let's say we're looking for a first full day of a full sell through and that was our rule

or modifier.

And we wouldn't sell unbeaten whatever word, because it it's only the first day, but we will sell

the second full day that's below the support line.

So this was again, our rule was the first full day you could see was not a full day as far as being

below the clothes, being below the support line, right close to it, you could say maybe right on

it.

But the first full day we could say is be not selling because that's a rule, our modified filter.

And then the second day we're going to sell on the second full day.

And so that's when we're selling on see the unfiltered rule without that would say, OK, you're selling.

As soon as you're breaking, you're breaking that line.

And you can see, OK, well, we've got these things in place.

And then we had this little turnaround and maybe they'll start a new uptrend.

Right.

But maybe we held in there a little bit longer than if we would have sold right at the line.

Again, who knows what else is going to happen after we break through the trend line of anything we

know.

What's supposed to happen is the trend is broken, but there are temporary pullbacks.

There are false signals.

And so this would be a way to kind of filter out a false signal if this was going to go back up where

it is the idea.

But that's that's how when you make your predetermined rule, then you follow your rule.

It's you've got to have discipline around that.

So if you're using a filter strategy, you know, there are definitely some arguments against using

filters for trendlines.

There are good arguments for using filters for maybe other indicators, but for trendlines, there's

some good arguments against them and should be aware of those.

And one of them is that the breakout principle is a very powerful and well-known concept.

If you just follow it and don't play with filters, you're going to be fine.

And that's that's very true.

In fact, they would be I would say the number one argument is stick with that powerful, well-known

concept and it's simpler that way.

And you can execute that way and you can have success that way.

Also, when, you know, other traders are following that powerful welldone concept.

So they're getting out to as well.

Again, trying to, let's say in the case of a cell rule, they're getting out because the trend lines

broken.

So it's putting more downward pressure because they're following the core rule around that and they're

not using a filter.

So that's one way that's a great strong argument.

Another argument would be that, you know, each security should, in theory, have its own filters

apply to as one size does not fit.

All right.

Each security is its own kind of entity.

Thus you'd have to juggle many different amount and duration filters to trend lines to really make it

work or be fair application.

And that's hard to apply and track.

Right.

If you if you're tracking whatever, pick a number ten different securities just to pick a number.

And each one has its own filter and some are duration filters and are time filter or or or percentage

filters or time filters, whatever it might be.

That's a lot to juggle around that.

It makes it hard to stick to your discipline, predetermined rule.

So that's a little that's a good argument too as well, though.

I think with a lot of security, is there some there's more commonality than that.

But there is a good point that each one certainly is its own entity and you have to be wary of that.

But as you apply and you learn your filters, you can kind of overcome that argument a little bit.

But that first one, that the breakout principle is powerful, that's a very strong argument.

So here is a strategy you can use.

You don't have to use it as a filter strategy.

And again, you can always fall back to the core four core rules around that.

They're their core rules for a reason.

So think of it that way.

But if you like the idea of trying to use filters or other ways to modify to kind of not if you've been

getting frustrated with maybe getting out too soon when it's actually more of a stronger trend and maybe

using other indicators to help you, you can use these filters, these other types of strategies to

try to manage your way through the most vexing problem in technical analysis, which is false breakouts

for sure.