Filter Rule

Filter Rule

In technical analysis, an arbitrarily set percentage of increase or decline in a stock's price that the analyst sees as an indicator to buy or sell the stock. For example, the analyst may set his/her own filter rule at 15%. If the stock rises 15%, the analyst recommends buying; if it falls 15%, he/she recommends selling. While the particular percentage is subjective, one arrives at it by observing the stock's historical trends. The filter rule exists to help the investor avoid buying or selling at insignificant or anomalous changes in price. However, many analysts do not believe that the filter rule consistently produces profits for the investor.

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filter rule

A technical trading rule in which an investor buys and sells stocks if their price movement reverses direction by a minimally acceptable percentage. For example, a technician may decide on a filter of 10%. If a stock being followed by the technician subsequently reverses a downtrend and rises by 10% from its low price, the filter rule indicates that the stock should be bought. A 10% decline from a high price indicates that a stock should be sold or sold short. The size of the filter is determined by the technician. The filter rule is supposed to permit an investor to participate in a security's major price trends without being misled by small fluctuations.