The Road to Successful Trading

Selection Filters 
The first step in the trading paradigm is trade selection. For traders who trade in equities, each trade 
selection is the starting point for each trade. However, some traders become experts on just a few 
investments like a few currency pairs or commodities and the actual trade selection is only 
important when looking for alternatives when the main vehicles are not acting as they should.
A filter is usually a set of technical indicators used to help select a potential trade out of the 
thousands of possibilities. Each equity price and volume creates data that can be analyzed in the 
attempt to fathom the future; “technical entrails”, if you will. Data is food for computers and 
programs have been developed to reach out and grab specific data that can be “screened” for its 
pertinence to a selection. For example, a filter can be set up to collect the data on stocks that have 
an RSI (Relative Strength Index) of below 30% if a trader is looking for a possible reversal in 
direction. Another filter might look for stocks with a low P/E and increasing cash flow. A filter can 
be designed for an almost unlimited number of indicators depending on what indicators the trader 
feels provide valuable information. As a general rule, a “high probability trade” will exist when a 
multiple of indicators support each other. 
Two things are needed to develop a selection filter: 1) a data feed; and 2) computer program. Data 
service providers used to be expensive but now most trading platforms offered by brokers provide 
data-free of charge-to clients. In addition, most trading platforms offer a fairly wide variety of 
filters and charts. However, as these programs are usually “heavy”, you should have a computer
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with a lot of power and speed otherwise, you may find yourself nervously tapping your pencil and 
swearing at the computer as you wait for it to give up the information you want. 

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Many screening programs allow you to select the filters you want. The following is an actual 
screening filter developed and used by a stock option position trader. The trader is looking for a 
high probability trade where the stock will be reversing its short term up trend. 
1. Increasing Put/Call ratio 
2. RSI Above 70% 
3. Price near upper Bollinger Band
4. Decreasing volume 
5. Increasing Implied Volatility
6. Decreasing Detrended Price Oscillator
7. 20 day SMA starting to roll over 
To this particular trader, these are important indicators which he/she feels provide a significant 
indication of future direction of price movement. If at least six of the seven indicators support the 
thesis that the trend will be reversing soon (for the position trader this would mean within the next 
three weeks or so), the trader will put the stock on a priority list of potential trades. Needless to say, 
there are probably as many filter setups as there are traders! However, these filters are not arbitrary 
in any sense of the word. To set up a proper selection filter, a trader needs a solid understanding of 
what each indicator implies and enough experience with them to feel confident that they reveal 
significant information.