V.6:2 (46-50): Pelletier on PDI

Pelletier on PDI

Bob Pelletier is a distant but favorite figure to us at Stocks & Commodities. He's distant, residing in Florida while we are in Seattle. He's a favorite because for years he has supplied us with data and software for trading.

We've watched CSI grow from a small package that could run on Apples and Commodore 64's to a full-service data vendor for major institutions. To us the interesting thing was that Bob himself, with the help of a band of programmers, was constantly developing new indicators and technical trading tools. His monthly newsletter often read like a trader's instruction manual.

This creativity seems to have reached its apogee when Bob's indicator, PDI (Probable Direction Indicator), was published. Then version II was published, then version III. These, together with CSI Stop and CSI Trend, were proprietary indicators that Bob made available as an add-on product to the data service. Their distinctive feature was the use of probabilistic estimates of future price behavior. The probabilities used were gathered from the time series itself, not an arbitrary "parameter. " An added level of sophistication was that the weighting accorded to any one estimate was adjusted as it performed — or failed to perform — well.

PDI itself acts like an extraordinarily sensitive overbought/oversold indicator (Figure 1), one which sometimes catches major moves well and other times bounces both with and against trends.

None of this material is disclosed so that you or I can learn from it or study it. You must play with it long enough to learn what the indicator is saying. However, the little that was disclosed persistently piqued our interest. We called Bob determined to pry all we could out of him. Here's the result.