What is the function of a point or percentage filter in technical analysis?

The function of a point or percentage filter in technical analysis is primarily aimed at determining the validity of breakout penetration. In the context of technical analysis, a breakout occurs when the price moves outside a defined support or resistance level, usually accompanied by increased volume. However, not all breakouts are created equal; some may be false breakouts that could lead to losses if traders act on them too quickly.

By using a point or percentage filter, traders can avoid premature entries or exits by requiring that price movements must exceed a specific threshold before being considered legitimate. This filter helps to ensure that the breakout is substantial enough to suggest a continuation of the trend, reducing the likelihood of getting whipsawed by minor fluctuations. Utilizing these filters aids traders in confirming breakouts and determining whether to act on the price movement, thereby enhancing their decision-making process.

The other options relate to different aspects of trading strategies or technical analysis concepts but do not specifically capture the primary utility of point or percentage filters. Such filters are not typically employed for setting target prices, establishing trend directions, or signaling entry points directly but rather serve to validate the strength of price breakthroughs.