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Bob Fulks wrote:
>At 12:26 AM 1/7/2004, Alex Matulich wrote:
>>I was under the impression that ratio adjustment was simply a
>>weighted average of the current contract and the next out-month
>>contract, weighted according the position of the current date
>>relative the the prior and next rollover dates. As such, the ratio
>>adjusted data should be very close to the actual futures price no
>>matter how far back in history you go.
>>
>>This is what I thought -- I have been using ratio-adjusted data
>>as an approximation for the cash market as a means to generate
>>signals far back in history. I use that for signals, and use the
>>reverse-adjusted data for trading.
>
>Not correct as I understand it.
>
>I understand that ratio adjusting simply multiplies the old
>contract prices by a ratio to make them match the current contract
>prices.
Yes, I think that's probably what Pinnacle is doing. Frankly I
like my idea (described above) better. Prices still won't ever go
negative, and the distortion in bar-to-bar changes in price would
be negligible, at least for medium or long term strategies. You
can use calculations that rely on percentages and ratios of prices,
unlike with fixed adjustment. And over a long term you won't suffer
the huge distortion that ratio adjustment would give (e.g. showing
a high of $24 for silver on 1/21/1980 instead of something in the
high-40 low-50 range).
>Alternately, you could use an index as a proxy for the actual price
>level (but not for the bar-to-bar changes since the futures are
>noisier than the indices). This would be useful if, for example,
>you wanted to scale some stop to the actual level of the price.
That's what I thought I was doing: using ratio adjustment as a proxy
for spot prices, or for an index. I thought ratio adjustment was
what I described, not what you described.
>Some time ago I wrote a paper on this topic that is posted on
>several web sites including:
><http://www.tradingrecipes.com/files/cntcontr.pdf>
><http://www.traders2traders.com/papers/backadjusting_futures_contracts.htm>
><http://www.ellokn.com/news/?CurrMonth=08&ID=6&Mode=Daily>
Ah. I see what I thought was "ratio" adjustment is what you refer
to as "perpetual" adjustment. Got it.
THAT is what I really need from my data vendor. I'll have to ask
Pinnacle about it.
Alex
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