Portfolio Boss Documentation

Retracement Filter

 

 

This filter utilizes the powerful Retracement Rule that predicts a rally after a recent pullback/correction, and whether or not it's just a pullback (could be a reversal of the trend).

This is useful to time your entry into a Position: so not only you get a big discount during the pullback, but you'll get a much higher profit since the price will advance to a new higher peak.

 


This filter looks at the highest and lowest closing-prices of an instrument during the past certain days/months, and then divide the vertical distance (between such peak and trough) by a certain percentage.

Let's say for the past 200 days an instrument's lowest price is $25 and the highest price is $35, which means a distance of $10 between the trough and peak. Therefore, a percentage of 50% means $5 from the highest price, which equals a price of $30.

This 50% level (i.e. $30 price level) will be your support (or resistance) line, where the price may bounce back again after the pullback. So, you enter the position when the pullback is at that 50% level.

 

 

Different percentage levels may be used depending on what school of thought you believe: some believe in the Fibonacci ratio, in which 23.6%, 38.2%, or 50% is used.

Others use a simpler (but generally proven) percentage levels of 50% and 66%: prices will generally bounce at that 50% level, and if they don't, look whether it bounces at 66%. If it continues past 66%, then a trend reversal is likely, so get out of that position.


Note that this filter is best used with another filter that confirms you're in a trend (let's say the “Moving Average Cross Over Filter”).

And best of all, this Retracement Rule also works when you're in a downtrend, for example when you're trading Short Positions. That is, if a downtrending instrument rallies up, more often than not, it will bounce back down at that 50% line, so you'll get the best price possible for shorting (selling) that instrument before the price goes back down again.

 


 

1.  The first parameter defines whether the instrument's closing-price must be “Greater than”, “Less than”, “Between”, or “Not between” the percentage line(s). “Greater than” means the instrument's price must be “below” the percentage line, that is, it's actually going cheaper than the percentage line. 

 

 

And vice versa with “Less than”, i.e. the price must be “above” the percentage line.

Let's say during an uptrend, you will enter a Position when the instrument's price drops toward 50%; then set a value of “Greater than” “49%” for this filter. Another example, you will get out of a Position if the price drop is “Greater than” “66%”.

 


Or another example for entering a Short Position: You will borrow (and then sell) the instrument only if it hits the 50% line, which means the instrument's price must increase toward that 50% line before it bounces back down; so you set this filter to “Less than” “51%”.

 


But note, these “Greater/Less than” values are not the most intuitive:

  • First, if you set “Greater Than”, the price might actually be far below the percentage line (thus indicating a trend reversal instead of bouncing back), but still the strategy will enter that Position anyway.
  • Second, if you use “Less than”, the price may actually be far above the percentage line, thus you don't get as much discount as possible but the strategy will enter that position anyway.


So, the best way to use this filter is by using the “Between” value. Thus, in the above example, you will only enter a Position if the instrument's price falls between 40% and 50%. 

 

 

That way, not only you'll get a good discount, but you also make sure you don't buy instruments that are potentially going toward the downtrend.

With that being said, “Greater/Less than” may make more sense if you use this filter as a Sell Filter (exiting positions). So continuing with the above example, after you make sure you buy instruments that don't breach the 50% level, then you make this Stop-Loss:

  • if any of these Positions start breaking the 66% level, then get out of that Position. So, set this sell-filter as “Greater than” “66%”.

 

 


 

2.  The second parameter defines the percentage line between those highest and lowest prices of the past certain days. 

 

 

Remember that this percentage line is always calculated from the highest price, that is, 0% is at the highest price and 100% is at the lowest price.

 


 

3.  The third parameter defines how many days (or months) to look for the highest and lowest prices. 

 

 

Remember that this is a moving window; for example, a value of 200 days here means the strategy will find the highest and lowest prices from today until 200 days ago.

 


 

Notes:

 

 

  • After you applied this filter, some indicators will be overlaid on the Price Chart: one indicator is for the highest price of x days/months ago, one indicator is for the lowest price of the x days/months ago, and one indicator for the percentage line (or lines, if you use multiple percentage lines with the “Between” value, as explained before).

 

 

  • You may use this filter with another filter that finds currently bearish instruments (instruments that are currently going downhill), such as the Primitive Pattern filter (closing price 1 day ago is higher than the closing price 0 day ago a.k.a today). That's because this Retracement Filter by itself may buy instruments that are already well underway on the rally, so you don't get the best discounts from the beginning.

 

 

 

 

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