The 10% Swing Filter by Mark Vakkur, M.D.
Price filters identify trends while eliminating noise below a certain percentage change. Here's a trading method using a 10% price filter for the S&P 500 stock index.
Although trend-following systems work well during established trends, they can produce disastrous results at market turning points. For example, momentum investors obeying the dictum “Buy high and sell higher” could get crushed if they were fully leveraged at a major market top. Further, oscillators should theoretically help signal a change in trend, but often do so prematurely. A stochastic signals an overbought condition very early in a major rally. To participate in the bulk of major market swings while knowing when to tighten stops and reduce position size, a trader must have some means of estimating the odds of the market changing its trend. Here’s a simple method of putting history on your side by applying a 10% filter to the Standard & Poor’s 500 stock index.