System Filters - what are these?

You put a filter into your system to prevent something happening.

Probably, you are using the filter as part of your entry rules. This will make your rules more complicated but there is no problem with this as long as your rules are generally applicable and do not discriminate between commodities, for example.

Suppose you are considering a system that will enter the market after the price closes above a 15 day high.

You also decide you want some further confirmation that the market is ‘on the up’. So you will put in a filter that will permit these trades only if the 15 day moving average price is above the 30 day moving average.

This will obviously be applied as a general rule to all markets so there is no reason to think that any curve fitting is taking place. The filter will prevent any trade being opened where this ‘evidence of recent price strength’ is absent.

However, if further filters were to be proposed, there would be a matter for concern. Why are additional filters needed? Is there a rational justification for an extra filter or is it merely that tests show that it gives better results (curve fitting)?

 

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