filter rule investment & finance definition

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.