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Chuck,
I was just thinking of long systems. For long systems the worst that could happen is
the 50% drop would trip an exit stop and cause one to sell early (but no loss there
since one gets the other 50% as a cash dividend in one's account). I suppose there
might be an opportunity loss by being stopped out of the trade, but one's system
might regain that opportunity by buying another stock.
But short systems would be another matter entirely. The big dividend could trigger
false entries which I think would have a larger impact on results that a premature
exit.
Opps, I just remembered a painful experience when a large dividend did cause me a
loss in a long trade. Here is how it happened. When the news of the extraordinary
dividend came out, the stock began to rise and it continued to rise until the date
of record for the dividend payment came. Then as now I did not look at any news but
bought the stock based on its price action (looked like a substantial breakout to
the upside). I got in on the day after the date of record on what appeared to be a
small correction (buy the dips, right!) - Ouch. Since I was using a mental stop
based on EOD data, the stock was way down before I entered my sell order the next
morning.
However, that experience is likely very unusual. If I had entered a couple of days
earlier, I would have got the cash dividend that would have made up for the price
drop.
As I see it (still thinking the whole issue through so I may change my mind), taking
dividend data into account can be important for evaluating the profit of long
systems with very long holding periods, and for short systems using break outs for
entries. Dividend data would be less important (not totally un-important, just less
important) for short-term long systems.
Is there more to this than I am seeing?
b
--- Chuck Rademacher <chuck_rademacher@xxxxxxxxxx> wrote:
> b
>
> I hate to be a bit pedantic, but even a short term trader is affected by
> these distortions. Imagine the effect of a 50% in the price of any stock
> on today's chart. If you owned the stock, you would have 50% cash (or stock
> in another company) and your original shares worth 50% of what they were
> worth yesterday. However, what did the 50% drop in price do to your short
> term indicators? It would look like one SERIOUS breakout to the downside.
> Yes, you may go and look at the chart. But that's not what happens in
> backtesting a mechanical system, is it?
>
> Assuming that you backtest over a few years, even a very short term trading
> system will encounter many of these distortions.
>
> Can you see the problem?
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