- 1997: Volume 6, No. 3 Understanding Your Data for Better Trading

In the fast-paced high-stress world of technical analysis, it is easy for traders to take market data for granted. Questions about individual data points usually come up when a problem is suspected, such as a market fill outside the reported range or actual trading results that vary greatly from simulated ones. As data providers, we understandably have a different point of view. Yes, data may be just a cog in the wheel, an unseen input for your trading system, but we feel that getting to know your data can enhance your overall trading by fostering a better understanding of the analysis process. Here is an overview of the key components of data for use in technical analysis.

The Data Fields

Opening Prices—Some services, especially those devoted exclusively to stocks, do not offer opening prices and some others give the first price of the day. The opening-range average is the most appropriate number to report because it will be most representative of the fill you would have received whether you were a buyer or a seller at the open. If a data service always publishes the low end of the opening range, then all simulated buy orders would suggest you had an advantage even though the opposite is more likely. Many services use the bid or the low side of the opening range for their published price. They may be helping their customers fool themselves into believing they have a better solution for long trades than would be possible.

High and Low Price Reports—Look for the highest price actually traded in the high field and the lowest price actually traded in the low field. If there was no trading for the day, these fields should be left blank. In the event that no trading was reported for an exchange that uses the settlement system, all fields including the open, high, low and settlement would show the settlement price, and the volume field would show a zero

Most data banking services inflate the actual high or reduce the actual low to accommodate the settlement price whenever the settlement price lies outside of the daily high/low trading range. This forced distribution of actual trading information leads the unwary market analyst to conclude that trades can be consummated at prices where trading was not possible. Unlike most data suppliers, CSI's Unfair Advantage product preserves the actual exchange data reported so that the analyst can simulate past market conditions without compromise.

Settlement Prices—The settlement price is usually the last or "closing" price. However, this may not be the case for contracts of the metals and energy products markets. When contracts of these markets trade less actively during a given day or do not trade at all during the final minutes before the closing bell, their settlement prices may be outside of their actual trading range. This occurs when other contracts of the same market, usually those nearest to delivery, are heavily traded at the close of the day. They experience a range of daily highs or lows that, given carrying charges and interest rates, are not reflected in lightly traded contracts. Since settlement prices do not necessarily represent actual trades, then under the conditions cited, the settlement price could lie above the actual trade or below the lowest actual trade of the day. A committee of experts from the exchange is responsible for making the judgment call on settlement prices.

Cash Prices—Most services report prior day cash prices. At CSI we report current day cash prices for nearly all of the commodities followed. The cash price basis for each market is listed in the CSI Cash Price Fact Sheet. We provide the lag day (prior day) cash price for a few markets as noted.

Estimated Volume—For commodities and futures, it is useful to have both the estimated volume as quoted by the exchanges for today and the official volume and open interest for the prior trading day. For stocks and indexes, CSI quotes only today's volume.

Volume and Open Interest—For commodities and futures, look for yesterday's official volume and open interest today. The figures supplied should include volume and open interest for all contracts, both active and inactive, including switching months.

Format Choice

Given the anomalies of data content, form and presentation, the user may be faced with a decision to adopt a particular format for holding data resources. The futures industry seems to have focused on three choices including ASCII, CSI and MetaStock. The ASCII format is not very space efficient, but it is the most flexible. The MetaStock format was derived from the old CompuTrac (MetaStock) format and has proved to pass the test of time in that it seems to be insulated from large-number problems because of floating point number representations. The CSI format is quite popular because it can accommodate more information in the same fixed space, but numbers greater than 99,999 for price statistics can cause some user headaches. Depending upon the commodity you wish to analyze, one of the above choices will satisfy your needs.

Computed Contracts

Traders and analysts who study the futures markets often look to computed contracts so they can view long periods into the past to perform their back testing. A couple of cautions are in order that may help traders avoid being trapped by significant biases.

If you concatenate contracts together into one long back-adjusted series for, say, 20 years or so, you may see prices go negative into the past. What this suggests for your derived trading system is an unrealistic bias toward the long side of every trade you consummate. Inflation plays a role in all of our decisions, but is it reasonable that prices can be negative? It is important to recognize that every type of computed contract has some sort of defect and to keep that limitation in mind when evaluating your results.

We hope this information will help you to better understand your data, which, we feel, is among the most important factors in your trading system. Now that you know what your trading system is analyzing, you can focus your attention on how to best apply the results.

Bob Pelletier is president of Commodity Systems Inc., a data retrieval service offering daily updates and end-of-day historical data on commodities, stocks, options, indexes and mutual funds. In addition to their data feed, they provide software to assist traders with data retrieval and maintenance, graphic analysis, accounting and trading system evaluation. For more information, contact CSI at (561) 392-8663.