THE HAnDbook of TECHniCAl AnAlysisor r eversal is one where a selected filter condition is met. Depending on the filter
setup, valid breakout and reversal entries could be initiated at different price
levels.
It is important to note that a filter or combination of filters that a trader even-
tually elects must be in accordance with the type of market traded and the strategy
used. It should also suit the trader’s or investor’s behavior profile, risk capacity,
and trading objectives.
26.6.1 reconciling trader profile with the appropriate
entry Filter
Consider the behavior profile of the following four groups of market participants.
A. Risk averse with respect to time of entry but risk seeking with respect to price
on entry.
These participants require confirmation of a breakout or reversal prior to
initiating an entry. The entry filter is allowed to validate breakouts or reversals
up to some distance beyond the initial price penetration or test, and therefore
need not be too responsive. They do not mind paying a slightly less favorable
price on entry.
B. Risk seeking with respect to time and price on entry.
These participants do not mind initiating an entry prior to an initial price
penetration or test of a breakout or reversal, or very late thereafter. They do
not mind paying a less favorable price on entry. In this case, should the par-
ticipants elect to use an entry filter at all, it may be set to allow price the great-
est possible freedom of movement before a late entry is validated, thus being
more forgiving as it allows for greater noise exclusion. Should the participants
anticipate entry prior to the breakout or test, the election of a pre‐entry filter
is more appropriate, although the actual pre‐conditional settings may not be
attributed with much weight.
Figure 26.12 Entry Filters.