DecisionPoint Price Momentum Model

By: Siyanda Pali

First published: 27 July 2015

In the 1990’s, owner and President at Decision Point Carl Swenlin, a Technical Analyst since 1981, developed the mechanical trading system which the company now uses to generate profitable returns. The model used by DecisionPoint favours shares which are moving higher with strong momentum.



Carl states in StockCharts that the model works well for any security or market index which has a history of relatively low volatility, such as Mutual Funds. This model is simple to use, can be relied upon to be in the market during major upswings, to refrain from participating during major downswings, and to provide relative peace of mind.

Signals

The DecisionPoint Price Momentum Model (PMM) is strictly mechanical and is constantly either set on a ‘BUY’ or ‘SELL’ signal. In order for a PMM signal change to occur, prices must meet the following conditions:

Reverse at least 10% from the extreme price for the current signal.

Pass through the 200-day Exponential Moving Average (200 EMA)

It is important to note that both the 10% move and the 200-day EMA crossover must coincide for the signal to change. Once these conditions are met, the new signal is ‘locked in’ until the conditions for the opposite signal emerge.

Signal Examples

Example 1

If the PPM is on a BUY signal and the price is at least 10% lower than the highest price for that BUY signal, and the price is below the 200 EMA, the model changes to SELL.

Example 2

If the PPM is on a SELL signal and the price is at least 10% higher than the lowest price for the SELL signal, AND the price is above its 200 EMA, the model changes to BUY.









Example 3

The above graph shows how PPM signals appear on a chart. Upon inspection of the chart, one will notice 3 BUY and 3 SELL signals in succession during a basing period. This is an illustration of what happens when prices move in a narrow trading range. The price then subsequently shoots up for a highly profitable 100% one-year move. It is also interesting to note that despite an incredible 17.3% correction, the 2013 BUY signal remains intact.

History and Methodology Development

StockCharts further explains that in order to give long-term signals and for the model to respond to fairly large moves in the market, the 10% price move and the 200 EMA crossover criteria were selected. When the model was developed in the 1990’s, both criteria were tested individually with data starting in 1980. The 10% model generated about 25 signals and the 200-day EMA model generated about 55 signals. It became clear that both models generated excessive whipsaw and were untenable.

This was followed by the idea of combining both into one model. The result was a positive one. The number of signals was reduced from a combined 80 signals to only 9, with only 1 not generating profit. The results over a period from 1920 to then present day were not impressive. However, when back tested against a wide range of market sectors, the model proved effective. The above results are due to multiformity- the different shapes that different price indices possess. Where the model may exhibit poor results for one index, results of the model applied to other indices may be positive.

The DecisionPoint model demonstrates that it has the capacity to generate long-term profitable returns. However, it also has other strengths and weaknesses. Some strengths include the fact that the model does not let you miss major upswings or downswings unless the move is of a blistering pace. It also usually won’t stay wrong for long periods of time. While there may be some overshoot, the model will usually change directions after a maximum 10% loss. Weaknesses of the model are that it is still subject to whipsaw in times of high market volatility and when the market is moving in a narrow trading range of 10% or less. Secondly, if the price moves too far too fast, the 200EMA can be left far behind and a price move far greater than 10% will be required before the 200- day EMA screen can be tripped for a reversal signal.

References

StockCharts (8 July 2015) DecisionPoint Price Momentum Model [Online] Available from: http://stockcharts.com/school/doku.php?id=chart_school:trading_strategies:decisionpoint_price_momentum_model. [Accessed: 8 July 2015]
Swenlin C (10 July 2015) Gold-Eagle [Online] Available from: http://www.gold-eagle.com/authors/carl-swenlin. [Accessed: 10 July 2015]