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2020issue C0134-41

Combining a trend filter with a moving average and a stochastic oscillator

A long-term moving average can serve as a trend filter so mean-reversion trades stay aligned with the larger price direction. A stochastic oscillator then times entries and exits inside that filtered trend by marking short-term overbought and oversold stretches.

  • A long-term moving average can serve as a trend filter that keeps mean-reversion trades aligned with the larger price direction rather than fighting it.
  • Moving-average slope or position relative to price can define whether the market is in a bullish or bearish regime before any oscillator signal is taken.
  • A stochastic oscillator can time entries and exits inside a filtered trend by marking short-term overbought and oversold stretches.
  • Combining a slow trend filter with a faster oscillator accepts lag at major turns in exchange for fewer countertrend trades during persistent moves.
Entries in this reading3 entries
Current trackTrend filter137 readingsStochastic oscillator170 readingsMoving average449 readings

How the three tools work together

A long-term moving average can serve as a trend filter that keeps mean-reversion trades aligned with the larger price direction rather than fighting it.

Moving-average slope or position relative to price can define whether the market is in a bullish or bearish regime before any oscillator signal is taken.

A stochastic oscillator can be used to time entries and exits inside a filtered trend by marking short-term overbought and oversold stretches.

Dividend-adjusted SPY and trailing filter, 1995–2019

Traders should see the 2000–02 and 2008–09 declines against the long 2009–19 advance, and that the stepped overlay is late both leaving the 2007 high and re-entering after the 2009 low—the lag Colby describes for slow mechanical trend filters. Dollar readings come from the labeled dividend-adjusted SPY scale on the lower pane of the published MetaStock chart.
Traders should see the 2000–02 and 2008–09 declines against the long 2009–19 advance, and that the stepped overlay is late both leaving the 2007 high and re-entering after the 2009 low—the lag Colby describes for slow mechanical trend filters. Dollar readings come from the labeled dividend-adjusted SPY scale on the lower pane of the published MetaStock chart.SPY · daily · 1995-01-01T00:00:00.000Z to 2019-12-31T00:00:00.000Z

Upper-pane PPO traces sit on a separate vertical scale whose tick labels are not readable on this raster, so those oscillators are omitted. Readings are approximate to the nearest five dollars.

Lag, persistence, and market-specific settings

Combining a slow trend filter with a faster oscillator accepts lag at major turns in exchange for fewer countertrend trades during persistent moves.

Parameter settings for the filter, average, and oscillator are market-specific and should be checked with walk-forward testing rather than treated as universal defaults.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
32 of 33 in the Trend filter track
202048-53 pp.Next on Trend filterConstructing a relative-strength oscillator with a rank-agreement trend filterThe first stage forms a relative-strength oscillator from accumulated close-to-close advances and declines over a stated lookback.
All readings on this track · 33 readings
  1. 1988Opening-range brackets, a two-bar trend filter, and bounded stops
  2. 1990Bezier-curve price trend filter
  3. 1992Constructing a damping-index trend filter
  4. 1992Building a random walk index trend filter
  5. 1992Phase diagrams for moving-average trend filters
  6. 1993Volume-weighted change smoothing and trend ranking
  7. 1993Concurrent highest-low filter with a largest-low-fall trigger
  8. 1994Unit-invariant trend filters and the c-test
  9. 1995Constructing cup and cap entries with a three-bar net line
  10. 1997Why a daily timing evaluation depends on interval, lookbacks, and the fitting objective
  11. 2001A volume budget clock for trend-segment construction
  12. 2001Keep three jobs separate when you test a composite score
  13. 2002Evaluating the weekly four-percent close filter as a market-state procedure
  14. 2003Constructing a confirmed zigzag trend filter
  15. 2004Decompose high, low, and close into separate forecast streams
  16. 2005Three-state moving-average breakout bar coloring
  17. 2005Constructing a volume and move-adjusted trend filter
  18. 2005A fifty-day average breakout as a trend permission filter
  19. 2005Current-bar inclusion can mute a stochastic channel break
  20. 2006A stochastic oscillator gated by a long-term exponential average
  21. 2010A construction test for a modified volume-price trend filter
  22. 2011Constructing a Spearman rank trend filter
  23. 2013Constructing a repeated-median slope as a resistant trend filter
  24. 2014Combining a relative-strength index and trend filters for oversold setups
  25. 2014Price-rooted lookbacks for a relative strength index, a moving average, and a trend filter
  26. 2015Evaluating next-session intermarket range forecasts
  27. 2018Read the intermarket weight matrix first, then the predicted moving-average filter
  28. 2018Constructing the stiffness trend filter from moving-average holds
  29. 2018The averaging kernel and the lagged trend gate are separate specifications
  30. 2019A trend filter is not ready to compare until portfolio constraints are written down
  31. 2019Lookback, threshold, and position-capacity for a stiffness trend-filter
  32. 2020Combining a trend filter with a moving average and a stochastic oscillator
  33. 2020Constructing a relative-strength oscillator with a rank-agreement trend filter
By fieldTrend and mean reversion93 readingsBy year202085 readings
All 137 readings tagged Trend filter
Also on Trend filter5 readings
2006A stochastic oscillator gated by a long-term exponential average2005Current-bar inclusion can mute a stochastic channel break2014Constructing a MESA stochastic with roofing and SuperSmoother filters2020Gating volatility-momentum divergences with a Trend filter1982An odd-length smoother from a cycle cutoff