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DT Trend Filter

Traders often use trend indicators to filter trades and determine the direction of the main trend. However, all trend indicators lag the market and are prone to producing false signals, known as whipsaws. The Dynamic Trend Filter (DTF) adapts to market volatility by varying the moving average period used, resulting in fewer false signals than a static moving average. Backtests show the DTF performed better than a standard moving average and MACD indicator at signaling trend direction and avoiding whipsaws during a recent bull market period. The DTF can be a valuable complement to other Dynamic Trader indicators and routines for confirming trend changes.

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190 views3 pages

DT Trend Filter

Traders often use trend indicators to filter trades and determine the direction of the main trend. However, all trend indicators lag the market and are prone to producing false signals, known as whipsaws. The Dynamic Trend Filter (DTF) adapts to market volatility by varying the moving average period used, resulting in fewer false signals than a static moving average. Backtests show the DTF performed better than a standard moving average and MACD indicator at signaling trend direction and avoiding whipsaws during a recent bull market period. The DTF can be a valuable complement to other Dynamic Trader indicators and routines for confirming trend changes.

Uploaded by

anudora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Dynamic Trader’s Exclusive

Dynamic Trend Filter


Many traders use a trend indicator to filter trades. The objective of the
trend indicator is to signal the direction of the main trend. If the main trend
is bullish, only bullish trade signals are considered. Other traders may use
a trend filter to switch in and out of intermediate or long-term futures or
mutual fund positions.

All Trend Indicators Lag The Market


The major weakness of all trend indicators is they are lagging indicators.
The indicator does not indicate a trend reversal until after-the-fact. In
trading-range markets, most trend indicators will give many false trend
reversal signals resulting in many ”whipsaws.” The trader’s and investor’s
objective is to use a trend indicator that will provide the fewest false
signals of trend reversal yet still react fairly quickly to legitimate trend
changes.
The most widely used trend indicator is a moving average of closing
prices. If the closing price of a market remains above the moving average,
the trend is considered bullish. If the price closes below the moving
average, the trend is considered bearish.
Unfortunately, there are usually many whipsaws using a moving
average as price temporarily closes beyond the moving average.
Dynamic Traders Dynamic Trend Filter (DTF) results in far few
whipsaws. The Dynamic Trend Filter includes an index that considers the
volatility of the look-back period to determine the appropriate moving
average on a bar-by-bar basis. A relatively stable period with relatively
small daily price changes will result in a relatively low volatility index and
shorter moving average period. A relatively volatile period with relatively
large daily price changes will result in a relatively high volatility index and
a longer term moving average period. The Dynamic Trend Filter will filter
out much of the “noise” or temporary, short-term volatility within the
larger degree trend. The Dynamic Trend Filter is ‘dynamic’ because it
adapts to the recent volatility of the market rather using a fixed or static
relationship.

The Dynamic Trend Filter Is More Reliable


The SPX (S&P cash index) daily data chart below includes two popular
trend indicators, the 13-period moving average and 5-34 MACD, as well
as a 13-period Dynamic Trend Filter. First, review the chart then consider
the comments that follow the chart.

Dynamic Trend Filter - Page 1


Dynamic Traders Group, Inc. - www.dynamictraders.com - 520-797-3668
While the 13-period moving average (red line along data) does a fair
job of signaling the trend direction, you can see where there were many
false signals as the market closed below the moving average trend-line
several times during the recent bull trend.
The 13-Period Dynamic Trend Filter is shown as a histogram in the
top indicator window just below the data. The vertical green bars above
the median line of the indictor represent a bullish trend and the vertical red
bars below the median line represent a bearish trend. There were no
whipsaws during the bull trend swings with the Dynamic Trend Filter
while the moving average had six whipsaws during the same period. The
Dynamic Trend Filter did a much better job as a trend indicator than the
13-period moving average.
The lower indicator window shows the 5-34 MACD indicator for the
same period. As you can clearly see, the 5-34 MACD indicator did a poor
job of signaling the main trend direction for this period.
The Dynamic Trend Filter is just one of the unique routines available
in the Dynamic Trader Software. No indicator should be used alone to
make a trading or investing decision primarily because they are lagging
indicators. Dynamic Trader’s time and price projection studies and
routines are leading indicators and project the high probability time and
price zones for trend change. The Dynamic Trend Filter can be an
important complement to confirm trend change out of time and price
targets as well as help traders maintain a position through the majority of

Dynamic Trend Filter - Page 2


Dynamic Traders Group, Inc. - www.dynamictraders.com - 520-797-3668
the trend. The Dynamic Trend Filter may also be used as the filter for
trade direction of the Dynamic Trader Daily Trade Scanner.

If you are currently using any type of trend filter whether moving
average, MACD, ADX, etc. with your analysis, you should find that the
Dynamic Trend Filter will prove a far more valuable tool.
For more complete information on the Dynamic Trader Software and
Trading Course go to our Products and Services page.
Also, check out our Traders Education page which is also updated
each month.

Dynamic Trend Filter - Page 3


Dynamic Traders Group, Inc. - www.dynamictraders.com - 520-797-3668

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