Specter: A Finite State Trading Strategy

Josef Friedman profile picture
Josef Friedman


  • Specter, a finite state trading strategy is discussed.
  • Natural logarithms of return should be used in algorithm design and performance analysis.
  • An appreciation of high dimensional probability concepts is important in analyzing price action.

It's your spectre against mine. James Bond, Thunderball

The Legend

My previous article on Finite State Accounting, noted some technical flaws in current strategy evaluation models and proposed a framework to correct them.

Data science is the most important discipline for analyzing securities prices. Design flaws are revealed as an application grows in complexity. This does not indicate an error by the architect, but are a natural consequence of increased complexity. Failure to make regular design improvements results in stagnation and inhibits the creativity of application users.

Application designers of the past have produced deep and admirable work but it is a mistake to canonize something that must change over time to remain viable.

Introduction To Specter

In this article, I will outline a simple finite state strategy that has produced interesting results for the last few years.

The strategy is called Specter - a visible disembodied spirit.

In a normal moving average above strategy, a long position is taken if the current price of an equity is higher than a given moving average; Specter takes a long position in a different equity if the current price of a map symbol is higher than one of its moving averages.

As described in FSA, price data for an equity is stored in a detailed worksheet with the same name as the equity.

For example, worksheet UNH shows:

UNH PricesCreated by the author with data from Norgate

WPrice = (Open + High + Low + Close + Close) * .2 This is used to calculate the averages. Note - the exact nature of a final price won't make or break a strategy, but it is probably better to use some kind of weighting if only because the close can be manufactured to some extent.

R01 = One-day rate of change.

The one-day rate

This article was written by

Josef Friedman profile picture
Software developer, Excel VBA for quantitative technical analysis, specializing in analyzing groups of equities and ETFs.  Articles document development of market models and game theory.  Chess master.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SPY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Have been hedging SPY with ITM calls

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