filter rule

Filter Rule

Rules that attempt to guide investors towards buying and selling patterns that will be the most profitable.

Notes:

Filter rules are created from analyzing the historical price trends of a security.

Evidence has suggested that filter rules are rarely successful in creating profits for the investor.

See also: Back Testing, Technical Analysis, Trend, Trend Analysis

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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.