Trend Analysis
As an example, let us assume that a trader has decided to use a closing viola-
tion as the trigger for entry. The problem with closing violations is that prices may
close too far beyond the entry level. To prevent this, an additional price‐based
filter is used to limit entry to within a specified distance. In essence, the trader is
primarily employing the closing violation as an entry trigger, but is depending on
the price‐based filter to limit risk should the violation be overextended. In short,
double filtering is especially useful when employing time‐ or event‐based filters,
since these filters do not specify the exact price of entry, making the controlling of
risk ineffective and inefficient, if not impossible.5.4 Trend Participation
participating in the Market
There are four basic ways of entering and exiting the markets, namely:■ (^) To go long—buying to open a new position
■ (^) To go short—selling to open a new position
■ (^) To liquidate—selling to close an old long position
■ (^) To cover—buying to close an old short position
If a trader holds no open positions in the market, the trader is said to be in
cash. To square a position is to exit it. Traders may also reduce or neutralize
all directional risk by hedging their positions with equal and opposite positions
in the market. Buying at the current price is also referred to as buying at the
market.
figure 5.30 The Three Modes of Filtering.