Filter Rule - Explained
What is the Filter Rule?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is the Filter Rule?
A filter rule refers to a trading strategy devised by technical analysts to guide the investment patterns of investors and help them make the most favorable investment decisions. A filter rule is a technical analysis rule that is set based on the changes in the prices of commodities, especially from lows to highs. Hence, in a filter rule, an arbitrary percentage change in stock prices serve as an indicator for the appropriate time to sell or buy stock in the market. A filter rule is, therefore, a rule set to guide investors based on the interpretation of market or technical analysts about a stocks price history.
How Does the Filter Rule Work?
The filter rule is set based on the price momentum in the market, the rise and fall of the price is an indicator of the best time to buy and sell stock in the market. This rule analyses the historical price of a security with the aim of using the price trends to arrive at the most favorable buying and selling patterns for investors. A filter rule is a good approach that helps investors make profits from percentage changes in the prices of securities. For instance, if an analyst sets his filter rule at 10%, if a stocks price rises to 10%, such analysts will recommend buying and if it falls 10%, selling will be recommended.
Filter Rule Parameters
Generally, technical analysts set their filter rules using the historical patterns and trends of prices of stock, as well as their discretion. This is to say that different analysts can develop different filter rules. Traders use varieties of filter rules to make decisions regarding the appropriate time to buy or sell securities. Traders also filter trading orders based on certain notable price patterns and trends in the investment market. Filter rules have different percentages as used in trading, according to a study, lower filter percentages record more successes than filters with higher percentages.
Filter Rule Implementations
To implement filter rule, there is a specific software required, this software is used by technical analysts to create filter rules. Software systems used for trading analysis can be designed in a way that they provide a signal when it is appropriate to buy or sell or automated to execute the trade. While some traders opt for automated software systems, others prefer software systems that provide alerts for trading.