The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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the hAnDbook of teChnICAL AnALySIS

trend filters


A trend filter helps to identify a trend amidst the market noise and price volatility.
Below are three popular trend filters used to achieve such an objective (which is
by no means exhaustive):


■ (^) Via a double moving average crossover, with the shorter crossing above the
longer moving average signifying the start of a potential uptrend and the
shorter crossing below the longer moving average signifying the start of a
potential downtrend
■ (^) Via longer‐term oscillator signal line crossovers, with the oscillators crossing
above its signal lines signifying potential longer‐term bullishness and oscilla-
tors crossing below its signal lines signifying potential longer‐term bearishness
■ (^) Via the containment of prices above or below overlay barriers such as mov-
ing averages or trendlines, with price staying above the moving average or
trendline signifying that an uptrend is still intact and price staying below the
moving average or trendline signifying that a downtrend is still intact
One popular approach is to use the oscillator signal line crossovers in an
uptrend or downtrend to time entries, with the use of either an MACD signal
(or zero line) crossover or a double moving average crossover as a trend filter.
Figure 5.38 illustrates an MACD‐filtered stochastic crossover trigger to time en-
tries into the market. Long entries are initiated every time the stochastic crosses
above its signal line with the MACD above its zero line. Short entries are initiated
every time the stochastic crosses below its signal line with the MACD below its
zero line. The stop is placed just above the previous peak in a short position and
figure 5.37 Buying Dips and Selling Rallies.

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