All language subtitles for 4. Filters And Overcoming Whipsaws

So let's say we're experiencing these whipsaws with with a particular moving average and a particular

security we're looking at, and we want to try to, you know, reduce that a little bit.

There's some things that we can do around that.

And that's called we're going to talk about filtering and how in other ways that we can overcome these

whipsaws.

And so you're making less trading as far as that might occur on these false signals going above and

below the line, you know, in a frequent manner.

So let's take a look at that.

As far as overcoming whipsaws and that's mentioned, you use filters basically to filter out, you know,

and get to valid buy and sell signals and filter out the the valid signals from the false signals.

That's what you're trying to filter out.

Right to.

You want to you want to trade based on something that's a real signal versus something that might be

false.

And so here are some filters that you can use around that.

You know, one is time, you know, so the price has to you know, you could say you basically have

a time rule that says the price has to remain above or below a crossover point for a certain number

of periods.

So you can decide, you know, two periods, three, four, whatever it might be.

So you can you can put that in as far as timing.

So you're not as frequently trading because you've put in this rule that says, OK, across the line,

but I'm still going to wait two days to see you want to make sure we don't have a whipsaw.

Here is the idea of putting in a time or time filter.

Another way you can do it is the extent, right.

Looking at the price that's crossed that moving average line and say, OK, it's cross to that's great,

but it needs to cross by a certain percentage.

The price has to be either above or below the line by seven percent, two percent, five percent, whatever

the number you want it to be.

As far as before, I'll take action.

Yes, the moving average crossing has given me an indicator.

It's a strong indicator, but I don't have that whipsaw action.

So I'm going to put a rule first, you know, when I'm going to buy based on how far above or below

the line.

Also volume.

As we know, volume can be a strong indicator and it's solid as far as really more of a confirming indicator

confirming what's happening.

So you might say, OK, for the crossover has to be accompanied by a significant rise in volume.

Again, higher volume, higher amounts of training as more of a confirming indicator that what you're

seeing is true.

So if I see a crossover with very low or decrease in volume, I might ignore it.

But if I see a crossover with a lot of associate volume coming with it, then I might, you know, use

that filter and Volkert and say, OK, I'm going, I'm going to do that.

Or you could put in something like, I want to have extreme sentiment.

Right.

I'm going to I want there's an uptrend and I want to really confirm that's uptrend.

So not only does the closing price have to surpass that, but the but the low actually of what's the

catalyst buyer has to cross it to slight the bottom of the wick, the low part of the range.

So not only is the price crossed, but as far as the price at the closing of the trading day, but also

in the trading range, the very bottom of the wick on a candlestick, the low has to suppress it, too.

So I'm looking for extreme sentiment that we have crossed this price bar.

And that's really a true filter, a true indicator.

And we're using this filter to really make it kind of do extra work to prove that it's really true.

And then a downtrend you the high would have to you know, the top part of the shadow, the upper shell,

the top part of the wick would have to cross under the move, under the moving average, not just close,

but you're looking at the wick and you're looking for it to cross as well in that range in the candlestick,

too.

So I've put some kind of rules around this with these filters, whether it's the time, the extent,

the volume, or I'm looking for the whole trading range to cross over not just the price to put in more

things to, you know, make me make a buy or sell a decision, you know, based on a trading rule,

in addition to the crossover to overcome these whipsaws.

Now, you probably are already seeing maybe a little bit of on the downside of filters, right.

So filters will help with accuracy or do less trading, but they can and in they'll help reduce whipsaw

losses, you know, as far as well.

Again, so you're not frequently trading or trading in the wrong way.

You're putting these strong rules.

But it filters also increase the leg to an already lagging indicator which can improve, which can reduce

profits.

So if I say I'm not going to I'm not going to buy into something till it's, let's say, two percent

not cross the moving average, but going to be two percent above the moving average.

Well, and I have added another maybe indicator, a lagging, added more leg to it where I could have

bought in sooner.

But I'm one at least make sure it's above two percent.

So I just cost myself two percent in that example.

So you can apply these filters based on your trading style and your feelings around risk aversion to

someone who has, you know, very low risk aversion, really wants to take a lot of risk, whatever

they'll have very low, if any filters and others are like, no, I want a little bit more of a perfect

setup.

And so I want to you know, I'm going to have maybe more than one filter, maybe another confirming

indicator before I make a trade.

I'll make less trades that way.

But I know when I do, I'll feel a lot more.

And on it, so if we look back at this chart again, you can kind of see where these whipsaws come and

you can see if I'm entering into this or I start following this particular security and I say, OK,

if I come in at any point and above that, I'm above the crossover line.

Well, I could be buying, right.

I might want to look at other indicators, look at trends, all that stuff.

But.

Right.

I know at least as far as my in this case, a 50 day moving average, I've got that long stretch where

I could have bought at any point of that.

And if I bought at the beginning of the far left boy, look at that nice run up I had in this security

just by holding it over this period and then selling it once it came down to crossing below the moving

average line.

Then we enter in this period of whipsaws, right.

You see the cell by cell by signals, again going back and forth, you know, and we see this crossing

ball, that last moving average line there.

We have the red arrow and you can see where we're definitely in more cell, you know, cell period or

don't buy period until the very, very end.

You see a kind of cross above two as well.

So you can see if we filter out these whipsaws more than we would have less of that cell by cell by

cell by.

But we might also miss out on its potential opportunities to.

So just a way to look at it but understand the moving average rule by itself is a very, very good and

very strong indicator.