A trading system based on the readings of one analysis tool cannot provide only accurate signals to enter the market. Without an additional assessment of the market condition, blunders are inevitable, which can significantly reduce the effectiveness of the applied strategy. Using filters in forecasting allows you to exclude unreliable signals and increase the profitability of trading.
Each forecasting tool provides accurate signals only under specific conditions driven by market sentiment. Some indicators are designed to work in a trend, while others are relevant for sideways movement. A trend reversal can cause false signals because the instrument cannot detect the right conditions for correct analysis. The trader must choose them himself. To do this, when working on Forex or with binary options, you need to use filter indicators. They are intended to confirm the main signal of a trading strategy. With their help, a trend movement from a flat is identified, and the main forecast is also confirmed.
Types of filters on Forex
The filters applied in trading strategies filter out false signals they give. Depending on the analysis tool used, they are classified into several categories:
- indicator;
- candle;
- graphic;
- temporary;
- economic;
- combined.
Indicator
When using the main signal of indicators in Forex as a filter, it is convenient to identify the current market sentiment and points at which a trend change is more likely to occur. The trader can use the analysis tools from the standard set of the MT4 trading terminal, or install them after downloading them from the Internet. When developing strategies with indicator filters, the formation of the main signal also occurs according to the readings of the indicators.
Candlesticks
Figure 1. Candlestick combinations that can be used as a filter
When used as confirmations of candlestick analysis, the main signal can be formed by indicators or. After its identification, it is necessary to analyze the configurations of the last formed candlesticks. By their combination, it is possible to determine whether the identified entry point is relevant.
Graphic
Figure 2. Chart patterns as instruments of the main or additional signal
Graphical analysis can be used both as a main signal and as a refinement signal. It is popular among indicator traders. However, most often market participants predict price behavior using patterns, and specify it with indicator readings.
Temporary
It is possible to identify true from false signal over time. When submitting it by the analysis tool, you can wait a little and understand whether the forecast was relevant. You can expect confirmation of the price movement or the formation of a filter signal. The disadvantage of this method is the possible loss of time or part of the market movement, which could be earned.
Economic
Figure 3. Filter of the main signal by the economic calendar
When trading any strategy, you need to be guided by published economic indicators. Their assessment is carried out according to the previous and current value. Working in the medium or long-term regimes, all parameters should be analyzed in a complex, which will help to understand the state of the state's economy and what is the likelihood of growth or fall of its national currency. If the signals of the trading strategy indicate a certain change in the value of the asset, and the economic state of the country cannot afford it due to the reasons caused by the facts of the published indicators, then you should not open a deal.
Combined
Mixed filters are formed by a set of tools and analysis related to different categories. They are considered the most effective because they minimize the likelihood of the underlying signal being out of date as much as possible. To obtain it, a simple indicator can be used, according to which it is impossible to accurately determine the entry point, since this task in a trading strategy is solved through a comprehensive analysis of a number of signals sent. Registration of an order and its activation in such trading systems is allowed if all instruments are indicated to move in the same direction.
Filter Indicator Examples
Filter indicators are not always used to filter out false signals. In most cases, they are also used as the main analysis tool. For example, a moving average can be a basic element in a trading strategy. If you change the default settings, it is applied as an addition to it. A buy trade can be opened only if the price chart is above the Moving Average line, and a sell trade is below it. If this filter condition is not met, the base signal should be ignored.
Oscillator indicators belong to the category of effective Forex filters. With their help, you can identify overbought and oversold zones. You should be wary of signals that do not correspond to the direction indicated by the oscillator diagram.
Filtration of Forex signals can be carried out using custom indicators that allow predicting and detecting a strong trend, as well as identifying an impulse from a corrective movement.
There are universal analysis tools that can be applied in any trading strategy as a source of clarification. These include indicators built into the trading terminal:
Figure 6. An example of a trading strategy in which the basic signal is the formed Wolfe wave, and the filter is the divergence on the stochastic
The indicator that is not provided by the MT4 software is popular and must be downloaded and installed. It is an enhanced version of the oscillator tool.
Figure 7. Indicator Trend Filter
Its chart changes its color when the market sentiment changes. The indicator accurately identifies critical areas in which the trend most often changes.
Figure 8. An example of trading with a filter - Trend filter indicator
Building a trading system using filters
Professional market players, when making a decision to open a deal, are guided by the signals of an independently developed trading strategy. They include analysis tools, which can be used to assess the relevance of the forecast generated by the underlying instrument.
The main signal source can be the indicator readings, which can be used to assess the direction and strength of the trend. Chart patterns and wave structures show good results. Any analysis tool can be used as a filter. It should be informative and combined with the main forecast, as well as complement it. When forming a trading strategy, certain rules must be followed:
- The basic analysis tool identifies the market trend and determines the direction of the global trend.
- The filter predicts the direction of the market movement.
- Additional tools identify the exact entry points by identifying points at which a reversal or continuation of the main movement is more likely to be predicted.
- Several tools can be used as filters.
- Primary and secondary indicators should confirm and clarify the readings.
When developing a trading system, you should think about the algorithm that you need to follow in the analysis of the market trend, which is necessary to make a decision to enter the market. All instruments can be combined, but you should not clutter up the chart with many indicators that will not help in making a decision, but will only distract the trader and raise doubts about any decision. Therefore, when selecting indicators, one should take into account their compatibility, information content and the possibility of clarifying each other. Only with this approach can signal confusion be avoided.
Outcomes
False signal filter indicators are applicable to binary options and the financial Forex market. All analysis tools differ from each other in appearance and functionality, but often their predictions coincide. Using this property reduces the likelihood of losses and increases the efficiency of the trading system.
Hello everyone, today I decided to talk about filter indicators, but before proceeding to their direct description, I consider it necessary to make a short introduction. Surely you already know that there are no completely win-win trading strategies, sooner or later losses may occur. If you open deals for all signals of only one strategy, then your total profit will decrease somewhat. In order to avoid unnecessary losses, experienced traders use filter indicators, which we will talk about today.
What are indicators filters
The word filter means the performance of certain actions, the main purpose of which is to filter out false signals.
Now I suggest you consider the most common types of filters:
- Indicators. Experienced traders, as a rule, use several indicators in trading at once, where some act as the main signals, and others as filters for false signals. Many trading strategies that are effective work exactly according to this principle.
- Time filters. These filters are most often used during time, as time plays one of the main roles in such trading.
- Candlestick and graphical analysis. It is about finding a certain pattern that is a harbinger of a certain price movement.
- Combined. These filters take into account several factors such as time and indicators.
In indicator trading, almost any instrument can act as a filter indicator, the choice of which should be made depending on the main one.
Popular indicators filters
Filter indicators are not always intended solely to filter out false signals; they can also be used as basic tools. For a clearer understanding, I suggest you consider an ordinary moving average as an example. Despite its simplicity, it is often used as a supplement to the main trading strategy, namely to determine the general trend in the market. If the main indicator offers to open a sell deal, and the price is above the moving average, then such a signal is recommended to be ignored and vice versa.
Various oscillators can also be classified as effective filter indicators. The well-known Stochastic is perfect for these purposes, showing overbought and oversold zones. So, for example, if the main strategy issues a sell signal, and the stochastic is in the oversold zone, then such a signal should be treated with caution.
Various indicators built into MT4 are also used as filters. For example, it does not display overbought and oversold zones, but it allows you to identify a strong trend. Yellow color indicates a strong trend, while red and yellow indicate the presence of a flat.
Universal indicators filters
It is impossible to tell about all the filter indicators in one article, as there are so many of them. I will try to tell you about the most effective and common indicator filters. I call these tools universal, as they are suitable for almost any trading strategy.
Moving averages are the most popular and highly effective. They are often used as support and resistance levels, as well as to determine the prevailing trend in the market. The period of the moving averages is determined depending on the time interval used.
Also, to create profitable trades, you need to take into account the timing of important news messages. This is especially important in situations where you decide to use small time intervals and several at the same time. To make it easier to follow the release of important news messages, specialized filter indicators were created that display all the necessary information in a specialized window on the trading chart. These algorithms are especially useful if you are trading on several working pairs and you do not have time to follow the news yourself.
Creating a trading system using filter indicators
Most of the experienced traders in the process of trading prefers to use not only indicators, but also tools for performing graphical analysis. How exactly this is done is best seen with a specific example.
Let's say a trader is going to create an order in the direction of the dominant trend immediately after the correction process is complete. In the role of the main signal source, you can use the Fibonacci levels, as well as the method of graphing. Indicators in this case will serve as auxiliary tools. To create effective rules for entering the market, a number of tasks should be solved:
- Determine if a trend is currently on the market and pinpoint its direction.
- Supply the Fibonacci levels with a filter indicator that can confirm the end of the correction, as well as the price level pullback.
In order to cope with the first task, you can apply such Forex filters as moving averages and ADX, and for the most accurate confirmation of the end of the correction, you can use Stochastic.
It is necessary to conduct trades according to the following scheme:
- Identify the presence of a trend in the market and determine its direction.
- The next step is to stretch the Fibonacci levels for a strong movement, which will be the last.
- Near important levels (61.8% and 38.2%), it is necessary to carefully monitor the movement of the price level, as well as the data of the Stochastic indicator.
In order to open a deal to sell a currency, you should wait for the moment when the price level after a jump up rushes down from an important level, ADX also moves down and the curves of the Stochastic algorithm intersect in the overbought area. In order to open an order to buy a currency, the market situation must be mirrored. For a more accurate entry into the market, it is best to monitor the situation on shorter time frames.
Talking about indicators in my blog, I always warned that their signals must be filtered, even if there is positive feedback. Today I want to offer you one of these tools - the 88 Filter indicator. It is used to confirm the reversal points of the trend movement and to open additional trading positions on corrections. 88 Filter easy enough to apply. It looks like a histogram. Signals appear when it crosses certain levels.
Installing the indicator in MT4
This is done as follows. Open "File" in the trading terminal menu. After that we click "Open data directory". Select "MQL4" in the list of folders. In it we find a folder called "Indicators". Insert the previously copied indicator file into it. After that, you need to restart the terminal. But you can not do this, but do it differently. In the "Navigator" tab of MT4, we find "Indicators". Call the menu with the right button, in which we select "Update". That's it, now you can work with the installed indicator.
Its main advantage lies in the sufficiently high accuracy of price reversal signals. Plus, it's versatile. The indicator can be used in trading any currency pair and on different timeframes, as well as in other markets.
And I also want to say a few words about the parameters. First of all, this is the number of bars that the histogram is based on. If desired, this parameter can be changed. But more important in this analysis tool are levels. By default, their values are 6 and 25.
Using the indicator in trading
Signal interpretation is simple. The crossing of the 25 level by the histogram indicates a possible change in the price movement direction. You can decide to open a trade order. Crossing level 6 indicates a short-term correction. These signals can be used to add to a trading position.
Let me remind you that you should not trade exclusively on 88 Filter signals. Its purpose is signal filtering. This tool will be a useful addition to almost any trading strategy. The reliability of its signals will increase if they are confirmed by the filter.
The operation of this indicator, like any other, must be tested on a demo account.
Download indicator:
It's no secret that trading in the financial markets begins with the development of a trading system. At the same time, traders use both their own practices and those of others, which they modify according to their own needs.
But any trading system gives a lot of signals to open trades, both true and false. Therefore, to process them, use filters on Forex... Today I propose to take a closer look at such filters.
The conditions of a trading strategy are a set of certain rules, in the presence of which actions are performed by a trader. These may include: opening or closing orders, or take profit, etc. What will the trader gain from applying filters on Forex?
“The most important thing is that these algorithms help to exclude false signals provided by the trading system. "
By eliminating such errors of the strategy from trading, we will protect ourselves from losses, or significantly reduce the number of negative results. The next positive aspect of applying filters in Forex is the optimization of the trading system itself.
Filter categories in Forex
All filters that are used by traders to sort signals in the Forex market can be divided into several varieties (categories).
To the first category include filters that are based on the use of Forex technical indicators. Here, to filter false signals, various technical indicators are used, which can be included in the standard set of the MetaTrader terminal or installed separately. Usually in such a trading system it is used to receive signals, the second part of the indicators is used to filter out false signals.
For the second category such filters are used in Forex, which are based on the use of graphical analysis. Filters like trading systems are very popular among traders lately. The essence of applying these filters is that when a certain combination of bars or candles appears on the chart, we expect confirmation of signals by subsequent bars or candles.
Next category Forex filters can be classified as temporary. The simplest example of a time filter in Forex is checking the validity or falsity of signals over time. That is, when a certain signal appears, it is simply worth waiting for a while, and then it will be clear whether this is a false signal. Of course, this is just one example of such filters. The disadvantage of such a filter is the time itself - the wait can drag on and turn into a waste of time.
Another category worth noting- these are mixed or combined filters on Forex, which can include a set of instruments of various categories. In my opinion, these are the most effective "cleaners" in the Forex market, which allow leaving situations with a high probability of a positive outcome to work.
Let's now look at examples of filter application in trading in financial markets.
Indicator Filter Trend Filter
The technical indicator belongs to the types of oscillators and is designed to determine the trend and movements in the market.
You can download it here:
The indicator is located in a separate window and is a line that changes direction and color when the trend direction changes. If the instrument line is colored green, then there is an upward trend in the market, or a flat movement with this trend.
A yellow line indicates either a trend change or a state of uncertainty. When the line is colored red, there is a downtrend or flat on the market.
The Trend Filter indicator is very effective in determining the direction of the trend. It allows you to exclude various market noises and false signals. Developers do not recommend using it as the main indicator of a trading system.
But if you use Trend Filter to filter out doubtful situations, then it will be most effective for the trading system. For example, if we have a sell signal and the indicator line is in the green zone, then it makes sense to ignore such a signal and wait for the trend to change.
Forex filters for false level breakouts
Another important, in my opinion, example of the application of protective algorithms in the Forex market is the identification of false breakouts of key support and resistance levels. As you know, these boundaries play an important role in the analysis of the price movement of currency pairs.
Often traders wonder if a breakout of such levels can be considered a serious market intention to move on, or is such a breakthrough aimed only at misleading market participants? Let's look at options for filtering false breakouts of important price levels.
The easiest way to determine if a price boundary breakout is realistic is to move the price above or below the price level. If the price, after breaking through an important level, passes only 15-20 points and then returns to this level, then with a high degree of probability we can talk about a false breakout.
Analyzing the history of price movements, it can be noted that for the main currency pairs, a movement by 20-30 points after the breakout of the price level is not a true breakout, and for cross-currency pairs, the limit of false breakouts can reach 70 points during volatile price movements.
As an example, we can observe a false breakout of the resistance level for the USDCAD currency pair. The price, having broken through the important level of 1.3165, went through to 1.3187, and then returned back. The breakout of an important level turned out to be false, after which a downtrend began.
So, let's summarize our review.
“Filters on Forex are not an independent trading strategy, you shouldn't forget about it. This is just one tool for determining whether signals are realistic. "
But the use of such filters in the Forex market will help to reduce the percentage of unprofitable trades and receive more accurate signals from the trading system.
It is also important to cancel that the older the timeframe used for trading, the better the false signals will be filtered out. That is, the most effective use of Forex filters will be in medium and long-term trading.
Order flow is a really powerful tool that allows most traders to see right through the market.
The ability to recognize a major player and the volume of his order, understanding who is really entering the market, namely bulls or bears, always allows you to get a general understanding of the future direction of price movement.
However, as with trading any instrument, there are always false signals that must be properly filtered out. In the Forex market, as such, you will not be able to see the order flow, with the exception of information shared by the dealing centers themselves, however, the topic of a universal filter for cutting off false signals is relevant, no matter what style you trade.
Entering a position as a trade filter
Each trader, at the moment of receiving a signal according to his own trading strategy, has two options for entering a position, namely, entering at the current asset price or waiting for the candlestick to close, and only after that enter the position.
If we enter a position at the current price, then, as a rule, the market is prone to sharp changes, and the strategy signal can be easily canceled by a sudden price jump in the opposite direction. Therefore, as a rule, the principle of entering a position by a closed candlestick is increasingly being applied.
However, this principle is quite aggressive, so I would like to introduce you to more conservative inputs that will allow you to cut off a lot of false signals.
Breakout of the signal bar
Unlike the aggressive classic closed candlestick entry, opening a position on a signal bar breakout is more conservative. Its essence lies in the fact that a position is entered not by a closed bar, but by breaking through the maximum or minimum of the signal candle.
To summarize, when a buy signal occurs, a position is entered when the price breaks the maximum of the signal candlestick, and when a sell signal occurs when the minimum of the signal candlestick is broken.
You may say that the entry is late, but this method allows you to cut off a lot of false signals. As an example, I propose to consider a typical false signal of the RSI indicator and simulate the situation if you entered a position by a closed candle. See the example in the image:
The example clearly shows that if you entered a position at a closed bar or at the current price at the moment of receiving a signal, you would be 100% thrown out of the market by a stop order and you would have received losses. Now let's look at the same signal in case of an entry on the breakout of the signal candlestick low:
The image clearly shows that if we applied a position entry on the breakout of the signal candle, then the signal should have been ignored, since the price did not break the low of this candle. There is also an even more conservative method of entering a position called "Second Candle Confirmation".
Unlike the previous considered option, in order to enter a buy or sell position, in addition to breaking through the minimum or maximum of the signal candlestick, it is necessary to wait for the close of the second candlestick. If the price has broken the minimum of the signal candle, and the second candle closed below this minimum, then you can safely enter a sell position.
For a buy signal filter, the price must break the high of the signal candlestick, and the next candlestick must close above this high. However, this filter is relevant only for traders who use trend following strategies and hold their positions for a long time.
Using this filter, you find only strong signals, but at the same time you lose at least the size of one candle in points, so this method is not relevant for scalping and pipsing tactics.
Output
In general, the proposed options for entering a trade are relevant not only for trading using the order flow, but also for any trading strategy. It is worth noting that many traders add various candlestick patterns as a filter. So, for example, if a buy signal appears with a bearish pin bar, this signal should be ignored.
If a sell signal appears on a bullish pin bar, it should also be cut off. In general, there are many different options for creating a filter against a false signal for your trading strategy, and as you can see from the example, this does not have to be some kind of indicator, but rather a simple pattern of price movement.
