What Is a Filter Rule?

A filter rule is a trading strategy tha❀t sets parameters for when to buy and sell inves🐼tments. The filter rule is commonly based on the belief that rising prices tend to continue to rise, and falling prices will continue to fall.

When using a filter rule, investors commonly mark a percentage change from prior prices. The designated percentage change may trigger a buy or sell depending on the movement of the price up or down. It is a subjective strategy, as the percentage level selected is based on the trader's analysis.

Understanding Filter Rules

澳洲幸运5官方开奖结果体彩网:Technical analysts use their discretion when setting parameters for filter rule trading. Generally, filter rules aꦆre based on historical trends and security price patterns identified fro🍸m the price chart of an asset.

A technical trader may notice that when the price rises 5% above a chosen level, it tends to move another 10% in that same direction. Therefore, the trader may use a filter rule to look for stocks that move 5% off a prior 澳洲幸运5官方开奖结果体彩网:closing price, low, or high.

The percentage is commonly based on short-term trends with securities moving between 1% and 10%. The levels could be smaller, such as 0.2% or 0.5% if based on intraday price movements. When using a filter rule, the trader must decide to trade in both directions, up and down, or only in one dire🦄ction.

Technical Analysis and Parameters

Implementing filter rules requires software that provides 澳洲幸运5官方开奖结果体彩网:technical analysis or charts that can be set for price alerts or to execute trades automatically based on an investor’s preference. Some traders elect 澳洲幸运5官方开奖结果体彩网:automated trading, which allows💝 them to takꦐe advantage of trading opportunities more rapidly.

Depending on the parameters, a filter rule can result in a large or small number of trades. Small parameters, such as 1%, will trigger far more transactions than 15% or 20%. Frequent traders must pay attention to 澳洲幸运5官方开奖结果体彩网:commissions and 澳洲幸运5官方开奖结果体彩网:position size. Commissions should be low enough and position sizꦬe large enough to cover the costs of frequent tradꦍing on small price moves.

Trading Example

Assume a day tr✃ader is interested in applying a 0.6% filter rule on Apple (🎶AAPL).

If the price moves 0.6% off a recent 澳洲幸运5官方开奖结果体彩网:swing high or low, the trader enters. They will exit their position if th♔e price moves 0.6% in the opposite direction from a swing high or low. The inves🍷tor applies this strategy between 9:30 AM and noon EST only, and any open position is exited at noon.

The chart shows how this could have played out on a day when ꦐthe stock moved over 3% during the allowed period.

The first trade resulted in a 2.29% gain. The second trade results in a 0.14% profit. The third trade results in a 0.03% profit. This assumes no slippage on orders, and commi🧸ssions must also be factored inꦅ.

The strategy discussed is for demonstration purposes only and is not a recommendation or advice.

The Bottom Line

A filter rule is a trading strategy based on price movements, typically dependent on a percentage change. Technica🍃l analysis or charts help investors determine the best filter rules to apply when trading stocks.