Saturday, January 30, 2010

Person's Proprietary Signal Backtesting

Person's Proprietary Signal is an odd beast in the world of technical analysis of the markets. Amid hundreds -- thousands? -- of open source tools whose workings are freely available, it is a black box.

I'm not a fan of faith-based trading, so I have spent the afternoon backtesting Person's Proprietary Signal to see what sort of results it gives. . . .


With the pps, you see a signal, and you act or don't act based on whatever other criteria you are using. But you don't know what triggered the signal. You don't know if any of your ancillary indicators cover the same ground. You know -- precisely nothing.

The signals appear upon the crossing of two "averages" -- a slow average and a fast average -- and given other tools developed by John Person, I presume they having something to do with the high, low and close over a period of time. But I don't know.

The pps isn't even available through all brokers. Think Or Swim is the main venue where it is used.



And yet, I've been using the pps for the past few months, with mixed results. And as I scan through hundreds of stocks in a day, I can see instances where the pps performed brilliantly in signalling a major move that came several days later. And I see many instances where the pps singalled, and nothing happened.

Here is a review of the pps signals on the exchange-traded fund that tracks blue-chip stocks, SPY, and what happened after the signals were given. In the discussion below, trades are assumed to happen at the closing price, since, Mr. Person says, a signal isn't official until the close of the period in which it appeared.

Bottom line:

In a year of trading I lost $1,726 (on paper) in 38 trades strictly according to the pps. I would have gained that amount if I had traded exactly opposite the signals.

Now, to be fair, Mr. Person recommends using his signals with a confirming tool. So, I put the macd histogram up on my chart. Just as an impression, it looks as though it would have flattened my entries and exits somewhat, perhaps reducing the loss but also the gain.

To verify that would take another round of backtesting. But not today.

And not knowing what elements go into Person's Proprietary Signal, I can't intelligently select a complementary confirming tool. A confirmation from something covering the same ground is no confirmation at all.

Had I simply traded cross-overs, bull and bear, of the 50-day moving average, I would have made a profit of $1,712 in five trades. Since the moving average was trending upward, if I had only taken bull trades, I would have made $2,329.

The data on the Person's Proprietary Signal is in the table below. All in all, it tells me that this is not a very good technical tool for trading, and I need to look for something else.

Some possibilities would be a simple monodirectional 50-day or 20-day moving average system. ("Monodirectional" means I only trade in the direction of the moving average slope.)

Another would be to take a look at pure price-based systems, based on the high, low and close, with a trading cycle of two or three days. More on that later.

Some caveats: The results I got in backtesting the pps might not apply to all markets or to all stocks. The S&P500, which SPY emulates, traded down into March 2009, and then up until January 2010. I don't know how the tool would behave in a major sideways market.

The results would have been improved by trading monodirectionally -- in the direction of the trend (higher highs and higher lows for bulls, lower highs and lower lows for bears). And that is, in fact, how I've been using the Person's Proprietary Signal the last few months.

So, as always in the world of technical trading, the discussion ends with a fair degree of ambiguity.

Two lessons here for private traders, I think.

One is to take nothing on faith but to backtest. Ronald Reagan was fond was saying, "Trust but verify". I go Reagan one better: Distrust and verify. Raging paranoia is an asset in constructing a trading plan.

Secondly, to do this work a would-be trader must be comfortable with ambiguity. It's the ground truth of the markets. I never fight ground truth.

Here's the backtesting data on 100 shares of SPY:










In dateOut dateDirectionIn priceOut priceDiffRunning

1/30/20092/6/2009bear82.8386.98(4.15)-$415

2/6/20092/10/2009bull86.9883.11(3.87)-$802

2/10/20093/10/2009bear83.1172.1710.94$292

3/10/20093/20/2009bull72.1776.714.54$746

3/20/20093/23/2009bear76.7182.40(5.69)$177

3/23/20093/30/2009bull82.4078.79(3.61)-$184

3/30/20094/2/2009bear78.7983.43(4.64)-$648

4/2/20094/20/2009bull83.4383.430.00-$648

4/20/20094/24/2009bear83.4386.66(3.23)-$971

4/24/20095/13/2009bull86.6688.501.84-$787

5/13/20095/19/2009bear88.5091.12(2.62)-$1,049

5/19/20095/21/2009bull91.1289.21(1.91)-$1,240

5/21/20095/26/2009bear89.2191.30(2.09)-$1,449

5/26/20096/15/2009bull91.3092.901.60-$1,289

6/15/20096/25/2009bear92.9092.080.82-$1,207

6/25/20097/2/2009bull92.0889.91(2.17)-$1,424

7/2/20097/13/2009bear89.9190.10(0.19)-$1,443

7/13/20098/11/2009bull90.1099.739.63-$480

8/11/20098/13/2009bear99.73101.57(1.84)-$664







8/13/20098/17/2009bull101.5798.31(3.26)-$990

8/17/20098/20/2009bear98.31100.99(2.68)-$1,258

8/20/20099/1/2009bull100.99100.20(0.79)-$1,337

9/1/20099/8/2009bear100.20102.94(2.74)-$1,611

9/8/20099/23/2009bull102.94106.183.24-$1,287

9/23/200910/7/2009bear106.18105.800.38-$1,249

10/7/200910/21/2009bull105.80108.232.43-$1,006

10/21/200911/5/2009bear108.23106.851.38-$868

11/5/200911/19/2009bull106.85109.822.97-$571

11/19/200911/25/2009bear109.82111.38(1.56)-$727

11/25/200911/27/2009bull111.38109.57(1.81)-$908

11/27/200912/1/2009bear109.57111.30(1.73)-$1,081

12/1/200912/8/2009bull111.30109.61(1.69)-$1,250

12/8/200912/14/2009bear109.61111.87(2.26)-$1,476

12/14/200912/31/2009bull111.87111.44(0.43)-$1,519

12/31/20091/4/2010bear111.44113.33(1.89)-$1,708

1/4/20101/15/2010bull113.33113.640.31-$1,677

1/15/20101/19/2010bear113.64115.07(1.43)-$1,820

1/19/20101/21/2010bull115.07111.70(3.37)-$2,157

1/21/20101/29/2010bear111.70107.394.31-$1,726

Note that the bear signal that began Jan. 21 is still in force. Jan. 29 is the last trading day since that signal.

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