Market Trend Filter – Trading

The Market Trend Filter in a momentum trading strategy has a powerful use case.

It helps you navigate bearish phases or overbought conditions by allowing you to tweak or pause your strategy during such periods.

Types of Trend Filters

There are three types of trend filters available:

1. EMA (Exponential Moving Average) – A stock is considered bullish if the price is above the EMA and bearish if it is below the EMA.
2. D Smart – A comprehensive indicator developed by Definedge. Price above D Smart indicates a bullish trend, while below D Smart signals a bearish trend.
3. MAST (Moving Average & Super Trend Combination) – A hybrid trend filter combining a Moving Average and the Super Trend indicator. Price above MAST is bullish, and price below MAST is bearish.

You can select any of these indicators to define the market trend.

Types of Market Trend Filters

Below are the ways to apply market trend filters:

1. Index Filter
   > Define a benchmark index such as Nifty, Sensex, or any other index.
   > Select a trend filter to apply.
   > If the benchmark index is above the trend filter, portfolio rebalancing remains active.
   > If the benchmark index is below the trend filter, portfolio rebalancing is paused.
2. RS (Relative Strength) Filter
   > Define the ratio of two instruments for comparison.
   > For example, Nifty 50 as the numerator and Nifty GS Composite as the denominator.
   > If the RS chart is bullish based on the selected trend filter, portfolio rebalancing remains active.
   > If the RS chart is bearish, portfolio rebalancing is paused.

You also have the Breadth Indicator option available for the Market Trend Filter.

The X% Breadth Indicator shows the percentage of stocks in an upswing (i.e., in a column of X – 1% x 3) within a selected group of stocks.

You can choose the index and set the criteria using two available options:

Above Level 75: If the breadth indicator crosses above 75, the Market Trend Filter will turn bearish.

Below MA: If the breadth indicator falls below its moving average, the Market Trend Filter will turn bearish.

Strategy Filters

If the market trend filter turns bearish, there are three possible approaches:

1. Exit only – Stop New Entry.
   > Stocks in the portfolio will be exited based on the exit criteria.
   > No new entries will be made until the market trend filter turns bullish.
2. Exit all long positions – Stop New Entry.
   > All stocks in the portfolio will be exited.
   > No new stocks will be added until the market trend filter turns bullish.
3. Change Exit Strategy – Stop New Entry.
   > Select new exit strategy in the box below that. Stocks will be exited as per the new exit strategy until the market trend filter turns bullish.
   > No new stocks will be added until the market trend filter turns bullish.
4. Change Exit Strategy – Continue New Entry.
   > Select new exit strategy in the box below that. Stocks will be exited as per the new exit strategy until the market trend filter turns bullish.
   > New stocks will be added as per the entry criteria.

This gives you flexibility to define bearish or overbought market conditions using price-based, relative strength, or breadth-based signals—so you can adjust your strategy accordingly.