Filter Rule

AAA

DEFINITION of 'Filter Rule'

A trading strategy where technical analysts set rules for when to buy and sell investments, based on percentage changes in price from previous lows and highs. The filter rule is based on a certainty in price momentum, or the belief that rising prices tend to continue to rise and falling prices tend to continue to fall. It is often considered a subjective screener, due to it being set by an analyst's own interpretation of a stock's historical price history.

INVESTOPEDIA EXPLAINS 'Filter Rule'

For example, under a 1% filter rule, an investor would buy a stock when its price rose to 1% above a previous low and sell it when its price fell to 1% below a previous high. Two research studies of filter rules from 0.5 to 20% found that only the 0.5% filter rule could generate above-average returns, but because of the high transactions costs associated with the frequent trading necessitated by the rule, the investor would not actually come out ahead.

RELATED TERMS
  1. Trend

    The general direction of a market or of the price of an asset. ...
  2. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
  3. Head And Shoulders Pattern

    A technical analysis term used to describe a chart formation ...
  4. Trend Analysis

    An aspect of technical analysis that tries to predict the future ...
  5. Backtesting

    The process of testing a trading strategy on prior time periods. ...
  6. Pattern

    In technical analysis, the distinctive formation created by the ...
RELATED FAQS
  1. How important are descending tops for a trading strategy?

    The descending tops pattern is one of the most commonly occurring chart formations in technical analysis. In trading terminology, ... Read Full Answer >>
  2. What are the most popular forms of technical analysis?

    The most popular forms of technical analysis are simple moving averages, support and resistance, trend lines and momentum-based ... Read Full Answer >>
  3. What is the difference between technical analysis and fundamental analysis?

    Fundamental analysis and technical analysis are distinct methods used to research and evaluate securities. Fundamental analysis ... Read Full Answer >>
  4. How are Tweezer patterns interpreted by analysts and traders?

    The tweezer is a very common candlestick pattern. Theoretically, this pattern is an indication that the current trend has ... Read Full Answer >>
  5. What is the difference between a drawdown in banking and a drawdown in trading?

    The term "drawdown" appears in both the banking world and in the arena of trading, but it has completely different meanings ... Read Full Answer >>
  6. How can the exponential moving average be used in swing trading?

    The exponential moving average (EMA) is a variation of the simple moving average that places more emphasis on the latest ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Confirming Price Movements With Volume Oscillators

    Use this indicator to validate a change in price direction and moving averages.
  2. Charts & Patterns

    Candlestick Charting: What Is It?

    Discover the components and basic patterns of this ancient technical analysis technique.
  3. Active Trading Fundamentals

    Identifying Market Trends

    The success or failure of your long- and short-term investing depends on recognizing the direction of the market.
  4. Forex Education

    How To Interpret Technical Analysis Price Patterns: Triple Tops And Bottoms

    Triple and double tops and bottoms may be tough to spot, but once you learn them, they can be powerful patterns.
  5. Trading Strategies

    How To Trade The Head And Shoulders Pattern

    The head-and-shoulders chart pattern is a popular and easy-to-spot pattern - once a trader is aware of what they are watching for.
  6. Trading Strategies

    Introduction To Technical Analysis Price Patterns

    To "find your game" in technical analysis, you need to be able to recognize reversals and continuations as they form.
  7. Active Trading

    Peak-and-Trough Analysis

    Prices never move in straight lines, so it's time to learn about this powerful trend-following technique.
  8. Charts & Patterns

    Why These May Be the Top 4 Growth Stocks of 2015

    These four stocks have high upside potential in 2015.
  9. Chart Advisor

    Interested in Growth Stocks? See These 4 ETFs

    Given the rise in popularity of growth ETFs, there are several interesting growth stock choices for investors.
  10. Chart Advisor

    Watch Out For Falling Copper Prices

    Commodity traders have been turning their attention toward copper prices over the past several weeks.

You May Also Like

Hot Definitions
  1. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
  2. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  3. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  4. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  5. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  6. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
Trading Center