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Intelligent trading filters for Tradestation and Multicharts and Ninjatrader 7

What are filters?

Air filter:

Allows clean air to pass into an engine and prevents dust particles and dirt from entering.

 Collander:

Allows water to pass through and collects the pasta or rice thus removing all the water

Catalytic converter:

Allows hot exhaust gases to pass into the atmosphere but first removes all the harmful emissions to ensure cleaner air

 

Filters can be used in Trading to enhance performance and reduce risk.

 

What is noise?

Noise is that unwanted phenomenon that is present in most instruments in the markets of today. Whilst noise is popular with traders who are chasing tiny moves and looking to scalp markets, it remains one of the irritations of trading that face all of us.  For a trend following trader, selecting low noise instruments is of paramount importance.

A low noise instrument can be traded with a tighter stop and therefore can carry a higher trade size for the same risk. The false moves that are created by many scalpers and day traders are less when we find an instrument with less noise. Some examples below offer a clear explanation of high and low noise instruments. 

 

Can you notice which of the currency pairs below has more noise?

                                 Currency pair  A

Currency pair  B

 

As you can see, both currency pairs are in an uptrend.  A has a lower noise level than B, and it is easily seen visually. There are two places on example B that a tight trailing stop might have got hit on, which could have been avoided by choosing A instead.

Unfortunately most traders just choose their favourite instruments and just stick to trading them, hence this is one of the main reasons that most traders lose.

The two price sets were observed during the same time period and the trader who opted for buying A would have a much better chance of keeping his trade open than the mug trader who bought B and got stopped out after just a few bars had completed.

Introducing the Precision Noise indicator

 

The Precision Noise indicator increased as the low noise uptrend became a high noise downtrend.

Can you see the noise indicator turning up just before the uptrend dies?

This phenomenon is frequently observed when a trend is about to change direction or has just changed, the technical explanation is quite simple.

In a rising trend the buyers are out-numbering the sellers and are calmly buying and adding causing higher prices. Then as some traders begin to think the trend is nearly ending they begin taking profits causing prices to fall and increasing noise. The noise increase is due to the fact that the imbalance of buyers to sellers is diminishing and the traffic is becoming more balanced to neutrality.

As more down-ticks ( sales ) occur in an uptrend this causes doja bars and spikey bars instead of larger bodied bars.

 

 
The simplicity of this filter is that it gives you a one glance number of what you are dealing with. Imagine the following scenario.

You do your daily scan and find ten different instruments you want to buy but your portfolio only has space for three of them. How can you choose the ones which are most likely to give you an easy ride without getting whipsawed and stopped out?

By selecting the lowest noise levels you are doing just that. Putting yourself in an informed position to know at that exact moment which instrument has the lowest noise.

Contrary to this, if you are a scalper who loves to steal a few ticks here and there, you will be choosing the ones with the highest noise. So this is a filter that will benefit anyone, regardless of their trading style.

Why do you need the Precision Noise indicator?

 

The above diagram shows in simple terms why low noise is better for trading.

  • As the stop can be placed at a tighter distance the risk is reduced
  • This factor alone allows a larger trade size as the risk is less
  • Trading low noise instruments is an excellent way to reduce draw downs
  • If a trader decides to risk $1000 on a trade and he trades the low noise example, he will make much more money than with the high noise example.

Mathematical explanation

Risk per trade $1000

Low noise stock entry price is at 500p and the stop will be at 495p, therefore 5 points are risked. $1000 / 5 = 200 shares.

High noise stock entry price is at 500p and the stop will be at 480p, therefore 20 points are risked $1000 / 20 = 50 shares.

If both trades are sold when the stops get hit, the trader who bought the low noise example will get a 15p higher exit price AND his trade is four times larger.

The difference in profits is going to be huge.

As we run through this example we note that both instruments peak out at 600p

Low noise trader gets out at 595p making 200 x 95p = 19,000 profit

High noise trader gets out at 580p making 50 x 80p = 4,000 profit

Not to mention the massive profit difference, you also can appreciate the huge stress that high noise trader has to endure in comparison to low noise trader. His ride through the trade is much rougher and its quite possible he will be shaken out by emotional decisions.  Low noise trader enjoys a low drawdown on his way to higher profits.

 

 

 

 Different types of noise filters:

Precision Noise indicator:

 

  • Filters out high noise or low noise.
  • Allows the user to receive the information they need.
  • Noise frequently peaks on equilibrium between buy and sellers.
  • Helping traders to identify a trend change possibility.
Ear defenders:

 

  • Filter out all noises
  • Helping the user to be oblivious.
  • There are none so deaf as those who will not hear advice.
  • (Indian proverb) 

 

Time to make a decision... Ear defenders or Precision Noise? Precision Noise available only on this site.

Price $125 (Pay-Pal)  Buy this item with Pay-pal

 

Ear defenders available just about anywhere

Price $4.99 (At most local hardware shops)

 

 

 

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