A magnetic sensor is operated by a method which provides a magnetic field extending through a preselected detection zone. A permanent magnet can be used to provide the magnetic field. The method disposes a magnetically sensitive component within the magnetic field and the magnetically sensitive component, such as a Hall effect element, provides a first signal that is responsive to a portion of the magnetic field imposed on the magnetically sensitive component. The sensor also determines a base value and measures a maximum magnitude of the first signal during a preselected period of time, such as the time required for a gear to rotate so that all of its ferromagnetic teeth pass through the detection zone. The sensor also determines a reference value as a function of the base value and the maximum magnitude. The sensor compares the first signal to the reference value and provides a second signal that is a function of the relative magnitudes of the first signal and the reference value, whereby the second signal is representative of the position of the ferromagnetic object relative to the detection zone.