September 19, 2019
Improve Trading Results by Using 'Negative Filters'
If you want to improve as a trader there are broadly two approaches you can take. You can improve by addition or improve by subtraction.
Trading culture is dominated by the first option. It’s all about what you can add to what you are doing to get more profit. What can you do to add more entries? What can you add to your system to improve your entry point?
However, sometimes the quickest way to progress is to improve by subtraction. You look at what you can remove or do less that will lead to better results.
So how can you reduce your losing trades? One way is to filter out the wrong situations using something we call ‘negative filters’.
What are the negative filters?
They mainly help to guide us towards two things:
- Avoiding opening trades in potentially dangerous situations where our trade entry criteria may be met but the overall market conditions aren’t suitable for good trading.
- Better manage and reduce our position size when a situation is risky and more uncertain.
Imagine the warning light that appears on the dashboard of a car.
What does it do?
It highlights a potential problem with the system. You can’t use it to drive, but it warns you about conditions when you either shouldn’t be driving or should be very careful.
Essentially negative filters work in the same way.
They are warning signs that something may be wrong with the current situation and extra care and attention may be needed,
How do negative filters work?
If you know your system doesn’t perform well in certain conditions, your negative filters are going to help you identify when there’s a higher risk of those conditions being in play.
For example, with the Duomo Method we prefer to trade in what we call ‘steady state’ markets rather than ‘herd activity’ markets. We have a number of negative filters, including our Triad of Price Action, that will help us avoid potential herd activity.
Let’s say you want to open a trade with 1% at risk. However, your negative filter shows it may be a risky situation.
You may choose to reconsider and reduce your position size or even choose to not enter the trade at all.
On the other hand, you could have a similar situation that matches the same entry criteria, but this time there is no warning from your negative filter. In this case, you will go ahead with your trade at 1% risk.
In other words, the negative filter is not going to help you enter the trade or increase your position size. Instead, its job is to help you reduce your position size or not enter in the appropriate situations.