Pinpoint Entry Points With Filters and Triggers

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Pinpoint Entry Points With Filters and Triggers

Define exact trade entrance guidelines to produce a consistent and decisive manner of entering the market. When it comes to initiating a trade, many traders may be inherently overly cautious or aggressive.

Those who are very cautious may find up sitting on the sidelines while waiting for numerous levels of confirmation, which often results in missed deals. Aggressive traders, on the other hand, may seize any opportunity to enter the market, often for no reason other than the urge to trade. Of course, this typically results in losing transactions.

To develop decisive trade entry, all traders, whether cautious, aggressive, or somewhere in the center, may profit from employing trade triggers and trade filters.

Key Takeaways

  • A trade filter enables investors to evaluate and pick assets based on certain parameters.
  • A trade trigger is any occurrence that fits the conditions for initiating an automated securities transaction with no further input.
  • Filters and triggers, when used together, may result in wiser, more objective trading methods.

Trade Filters

Trade filters indicate the setup criteria that must exist before a trade entry and hence before the trade trigger. Trade filters may be seen as “insurance” for the trade trigger. When all of the requirements for the trade filters are satisfied, the safety is turned off and the trade trigger is activated. Trade filters might incorporate a range of parameters, such as time of day and pricing location. The trade filters for the chart in Figure 1 include, for example:

  • The time is 9:30 a.m. to 1:00 p.m. EST.
  • A price bar has closed above the moving averages of 20 and 50 periods.
  • The moving average of 20 periods (blue) is higher than the moving average of 50 periods (purple).

On the 9:30 bar, all of these trade filter criteria become true, allowing the trade trigger to be triggered. The appropriate market circumstances for the trade trigger are defined by trade filters. Observation and backtesting are often used to build these filters. For example, a trader may have created a trading strategy that performs well in the mornings but poorly in the afternoons. The trader might then apply a time filter to restrict trade entries to a specified time period, in this example 9:30 a.m. to 1:00 p.m. EST.

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Figure 1: The trade filters have been met (in yellow circle) and the trade trigger is activated once price is one tick above the previous bar’s high, allowing for a precise trade entry.

Image by Sabrina Jiang © Investopedia2021

Filtering Considerations

It is critical not to restrict the “degrees of freedom” in a trading strategy while selecting trade filters. In other words, using too many filters may result in a statistically unusual trading setting that is unlikely, if ever, to occur. This severely restricts a trading plan’s potential to be solid, consistent, and successful. This is where the excessively cautious trader finds himself: basically screening out most trading chances.

One reason traders may over-filter a trading strategy is because after completing historical backtesting, they seek to remove all lost transactions. Backtesting is the process of testing a trading strategy or concept using historical data to see whether it may be lucrative in real-world trading. While backtesting is a useful technique for designing lucrative strategies, it may be abused, particularly when establishing how to prevent all (or most) bad transactions.

This is a kind of curve fitting in which the trading conditions are manipulated to perform best on historical data while generating an artificial system that performs badly in real life. When establishing trade filters, traders should attempt to develop filters that benefit the system as a whole rather than just one or two trades.

Once the trading filter requirements are satisfied, traders wait for the trading trigger to occur before entering a trade. This fundamental process is seen in Figure 2.

Figure 2 – This “timeline” shows the progression of trade filters, triggers and entries. Trade filters must first be fulfilled, and then a trade trigger provides the precise opportunity for a trade entry.
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Image by Sabrina Jiang © Investopedia2021

Determining the most lucrative entry and exit positions might be critical to your trading performance. The Investopedia Academy’s Technical Analysis course provides interactive information and real-world examples to help you improve your trading abilities.

Trade Triggers

Transaction triggers are like the line in the sand that specifies when a trade will be entered. Trade triggers, as opposed to trade filters, which might contain a range of parameters, instruct a trader precisely when to act. Trade triggers in the trading strategy should be completely objective and well-defined. There should be no wiggle space.

For example, “go long when the moving averages cross” may be expanded to “take a long position if the price is one tick above the preceding bar’s high after all trade criteria have been fulfilled.” This is the line in the sand that we need to draw in order to locate a precise trade entry. For the trade trigger to take effect, all of the trade filters must already be true.

The line in the sand is formed in Figure 1 after all of the trade criteria are met: the time is between 9:30 a.m. and 1:00 p.m. EST; a bar has closed above the 20- and 50-period moving averages; and the 20-period moving average is higher than the 50-period moving average. When the trade filters become true, the trigger is triggered. All of the filters got true on the 9:30 bar. The trigger happens when the price rises one tick over the peak of the 9:30 bar. When the price reaches this trigger, a long transaction is launched at the stated price.

The precise order type would be determined by the trader. For example, a system trader may put a buy stop order to pinpoint the precise price in the trade entry. A discretionary trader, on the other hand, may enter the deal at the best available price by placing a market order.

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Triggering Considerations

Trade triggers may be triggered by a wide range of situations, ranging from indicator levels to the crossing of a price barrier, such as a support or resistance level. Many traders employ technical analysis techniques, such as indicators, to identify high likelihood market scenarios.

Because specific thresholds may be readily defined, indicators can give an objective trade entry. For example, “take a long position when a 5,3 stochastic achieves a level of 30;” or “enter a short position when the average true range hits a level of 0.5.” The setup for these trades would be provided by filters, while the trigger would be provided by indicator levels.

A key feature of trade triggers is that they must be basic in order to be actionable. Too many trade triggers, or triggers that are unduly intricate, might become cumbersome and make the system difficult to apply. As traders grow confused about their own system, this may lead to frequent trading mistakes.

Trade triggers are similar to a company’s goal statement in that they should be simple enough to remember. Triggers should be objective and easily identifiable so that there is no doubt regarding whether or not the trigger was satisfied.

The Bottom Line

Trade filters enable traders to set favorable circumstances for entering market positions. The configuration is provided by these trading filters. Trade triggers represent a line in the sand—a threshold that, when reached, “triggers” the trading opportunity. Understanding how to utilize trade filters and trade triggers may assist traders in identifying and defining lucrative trading setups.

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