Market Trend Filter

Momentum portfolio investing is a long-term strategy that focuses on investing in trending stocks. However, when the market trend turns bearish and strong-performing stocks reverse, the portfolio may experience a drawdown.

A sustained bearish market can lead to higher drawdowns, but using a Market Trend Filter can help reduce risk 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

There are two 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.

Actions When Rebalancing is Paused

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

1. Exit as per strategy, No new entry (Recommended)
   • Stocks in the portfolio will be exited based on rebalance criteria.
   • No new entries will be made until the market trend filter turns bullish.
2. Keep Stocks, No new entry
   • The existing portfolio remains unchanged.
   • No new rebalancing will occur until the market trend filter turns bullish.
3. Exit all stocks in the basket, No new entry
   • All stocks in the portfolio will be exited.
   • No new stocks will be added until the market trend filter turns bullish.

The first option (Exit as per strategy, No new entry) is recommended for maintaining a balance between risk management and participation in market trends.