To dividend adjust or not to dividend adjust? That is the question.

About once a month, someone asks how important it is to have dividend adjusted data. Or someone will comment they do not want to use Norgate Data because they do not adjust for dividends (it does but it is not enabled by default). My answer has been “without dividend adjusted data, your results may be understated.” It has always bothered me that I could not give a better answer. In my post, “How much does not having survivorship free data change test results?” I covered other data issues but not this one. Since Norgate Data makes it easy to have two databases, one with the dividend adjustments and one without, it was time to run tests and determine how much of a difference it makes.

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What I am reading: 10/6/2014

Recent articles that I found interesting and made me think.

Learn Math or Get Left Behind

Every now and again, events occur that cause me to shake my head in dismay at people’s math skills. When the weather forecast is a 90 percent chance of a sunshine, and it rains, that doesn’t mean the forecast was wrong; rather, it was one of those cases where the low probability event occurred. Some people seem to believe that 90 percent and 100 percent are the same. Obviously, they are not.

Recall model assumptions before jumping to conclusions

I have written numerous times in this space about the importance of examining your assumptions before taking any action on quantitative research.

Advantages With Mechanical Strategies

A lot of the best traders (at least the ones I know) use some kind of mechanical rules in their trading. “Mechanical” implies that the rules are based on some kind of objective rules, usually quantified data. The trader should follow these rules exactly without hesitation or emotion. In this respect mechanical trading is the complete opposite of discretionary trading.

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing

In most domains of life, skill and luck seem hopelessly entangled. Different levels of skill and varying degrees of good and bad luck are the realities that shape our lives—yet few of us are adept at accurately distinguishing between the two. Imagine what we could accomplish if we were able to tease out these two threads, examine them, and use the resulting knowledge to make better decisions.

DTAYS Weekly Breakout Strategy With Time Stops

I recently read on Don’t Talk About your Stocks about an idea that stocks that were losers after (4, 6, 8) weeks should be sold to make way for other stocks that may do better. Will this idea improve the results from the original DTAYS Weekly Breakout Strategy? This reminded me of research I did while working for Larry Connors. On a mean reversion strategy we were researching, we noticed that after 10 days, 95% of the positions end up being losers. Then came the ‘obvious’ rule to add. Exit a position if it had not bounced after 10 days. We both thought this would greatly improve the results. It did the opposite and hurt them. Why? Because it was better to wait for the bounce even if the trade was a loser.

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Simple Ideas for a Mean Reversion Strategy with Good Results – Part 2

The Simple Ideas for a Mean Reversion Strategy with Good Results post generated lots of comments and emails about other ideas to try. This post will cover three of the most interesting ones.

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What I am reading: 8/25/2014

Recent articles that I found interesting and made me think.

VIX-Adjusted Momentum

The addition of many small details can make a big difference in seemingly simple strategies. I often like to use cooking analogies, and so I like to think of tomato sauce as a classic example: it contains few ingredients and is simple to make but difficult to master without understanding the interaction between components. Trend-following strategies are no different: anyone can create a simple strategy, few can master the nuances.

Do Risk-Adjusted Returns Matter?

The firm’s latest piece looks at smart beta and a host of factor investing data. One factor they looked into was the small cap anomaly. Past research has shown that small cap stocks have outperformed large cap stocks over longer time frames. Research Affiliates determined that this actually isn’t the case:

The Remarkable Truth about 52-Week High Stocks

On Wall Street, there are many highly publicized metrics that can trigger an emotional response in investors. The “52-week high” signal is a great example. It is a widely reported (e.g., Barron’s, WSJ, MarketWatch) and easily noticed statistic. Stocks at 52-week highs are at their peak versus historical values, and this is, presumably, valuable information. Also, peaks per se are salient, almost by definition, and so we tend to pay a lot of attention to them.

The Market Has Not Seen a Strong Up Day for Longer Than It Has Not Seen a Strong Down Day

Older post. We have recently seen the 2% down day but not a 2% up day.

It is a fact that the S&P 500 hasn’t had a -2% drop in the last 68 days but it also hasn’t had a 2% rise for 193 days. The market has given bears plenty of room to escape.

Frustrated by not being to test your own trading ideas? My AmiBroker & Backtesting 101 course starts in 2 weeks and there is still space left.. Click here to find out more.

Enjoy,

Cesar

Simple Ideas for a Mean Reversion Strategy with Good Results

A reader sent me some trading rules he got from a newsletter from Nick Radge. He wanted to know if these rules really did as well as published in the newsletter. They seemed too simple to produce such good results. This is a basic mean reversion or pullback strategy. The strategy as presented was long and short and went on margin but he wanted to know how it did the long only since he did not short. After contacting Nick Radge at The Chartist, I confirmed with him it was OK to publish these rules.

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What I am reading: 7/28/2014

Recent articles that I found interesting and made me think.

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Premium Data from Norgate Investor Services Review

THIS REVIEW IS OLD. READ THE NEW REVIEW: Norgate Data Review

Old Review below.

I am frequently asked what data provider I use. A year ago my data provider was CSI Data. Then I heard about Premium Data from Norgate Investor Services and the one feature that enticed me to look at them closer: historical S&P500 index constituent data. At that time, I was maintaining the data by hand. Each month I would have to determine which stocks had been added or deleted from the index. I would need to look for name changes in the current and historical list. Not a hard task but time consuming and easy to make mistakes. The thought of not having to do this was very enticing.

This review will focus on US Stocks and AmiBroker integration. Premium data has data for the Australian and Singapore markets, integrate with multiple other platforms and have forex and futures data. For more information go to Premium Data from Norgate Investor Services.

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Low Volatility Stocks: 20%+ CAGR Portfolio

Continuing on from our previous posts and research, Should one trade high or low volatility stocks? , Stops and trading high vs low volatility stocks, and Low Volatility Stocks and Profit Targets, we are now testing how these results translate to a portfolio. I pick one variation from each of the tables from the Low Volatility Stocks and Profit Targets. From that one a variation we create a portfolio with a maximum of 10 stocks.

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What I am reading: 6/30/2014

Recent articles that I found interesting.

We’re all Smart

When everyone in your field of choice is intelligent it’s much harder to separate yourself from the crowd.  The paradox of skill is what makes it so difficult to beat the market over time.  Finding undervalued assets isn’t as easy today as it was in the past because there are more smart people who know where to look. …

Trend following does not work on stocks

There’s a good reason why most professionals who apply models similar to trend following to stocks call them momentum models. It’s not just a clever rebranding, it’s really a very different game. To blindly cling to trend following as a religion, disregarding any real world evidence and attacking anyone presenting ideas that differ to the trend following mantra is not only unprofessional, it’s outright dangerous….

Is your risk random?

Your trading model might have a random risk element and you might not even be aware of it. In particular longer term models need special care to avoid ending up with random risk. …

Where Have All the Traders Gone?

What is causing the plunge in trading volume (and volatility)?