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What we've been discussing here is a *major* issue for academics who look at
technical analysis and "computerized" trading. A friend of mine who is a
Professor of Finance in the Chicago area undertook some price modeling
studies with a group of other "quants" (quantitative analysts) a number of
years ago designed to develop technical market models. The studies were
given up because the group agreed that *any* price series they developed in
the present day was not what was seen coming across the tape in real time.
This is due to a variety of factors - adjustments for stock splits, bad
ticks, and many other reasons. They therefore concluded that the study
could not be completed. To this day, my friend tells me: "You're working
with *cleaned up data*. That's not the way it was reported when it
happened..."
The Omega Man
----- Original Message -----
From: Mark Johnson <janitor@xxxxxxxxxxxx>
To: <omega-list@xxxxxxxxxx>
Sent: Sunday, June 13, 1999 9:45 PM
Subject: Problems with *stock* data back-adjustments
> Jose Pascual writes:
> %
> % So better use real futures contract data while using
> % or choosing of the 20,000 plus available securities
> % from NASDAQ, NYSE, etc... to backtest. It should work
> % on any ...
> %
>
> But remember that stock data HAS BEEN BACK-ADJUSTED
> (for splits). This can render backtests invalid.
>
> Here's an example: Jeff Cooper's "5 Day Momentum Method"
> only trades stocks whose price is above 50. It's one
> of the setups used by the system.
>
> And indeed an example setup in the book is Kellogg
> (stock symbol "K") on 21 July 1997. {page 22 of
> Cooper's book} On that day Kellogg stock was
> trading at 87, so it met Cooper's setup criterion
> (Price > 50) quite easily.
>
> But since then, Kellogg's stock has split. Go look
> at your stock price database --- you'll find that
> it says Kellogg was at 42 on 970721. So, in backtesting,
> THE TRADE WAS NOT TAKEN. But in real life, as demonstrated
> by the chart in Cooper's book, it was.
>
> You have just been misled by back-adjusted stock data.
>
>
> --
> Mark Johnson Silicon Valley, California mark@xxxxxxxxxxxx
>
> "... The world will little note, nor long remember, what we
> say here..." -Abraham Lincoln, "The Gettysburg Address"
>
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