Non Random Walk.com

Trade-A-Stock Web App FAQ

 
  1. 1.How are dividends calculated in the returns?

  2. 2.Are dividends present in the adjusted price series?

  3. 3.Why is the market data adjusted? How is it adjusted?

  4. 4.How does Trade-A-Stock handle margin?

  5. 5.Why do you separate out ETFs and Funds? What are they?

  6. 6.Why can’t I just pick the stock I want to trade?

  7. 7.What is hindsight bias?

  8. 8.What is the survivor or survivorship bias? Is it in your data?

  9. 9.What is your data source? Is it reliable? Have you done error checks? Have you cleansed or scrubbed your data?

  10. 10. How are the technical indicators calculated? How do I use them?

1. How are dividends calculated in the return?


Dividends are added to your return on the current trade on the close of the ex-dividend date. If you are short, then the dividends count against the return on your current trade. For a short trade your return is:


( Stock Sale Price - Dividends Paid - Stock Purchase Price ) / Stock Sale Price


For a long trade, the return is:


( Stock Sale Price + Dividends Paid - Stock Purchase Price ) / Stock Purchase Price


These numbers are converted to percentages (and rounded) before being displayed on the screen.


2. Have the prices been adjusted for dividends?


No, the data has only been adjusted for splits. This is realistic. Real time data doesn’t adjust for dividends. However, dividends are recorded and any dividends paid out while you have entered a trade will be included in your returns for that trade. The message panel in the control bar provides a message in advance of when a stock is about to go ex-dividend as well as the amount of the dividend. To view the dividends that are part of a trade go to: Menu > View Trades



3. Why is the market data adjusted? How is it adjusted?


The market prices are adjusted so as to hide the year in which you are trading and avoid hindsight bias. We randomly choose a large number and then  adjust the prices back from there.


4. How does Trade-A-Stock handle margin?


The application doesn’t have any mechanism to use margin to increase the amount of leverage when trading. However, in order to short a stock, one must have a margin account. The application assumes that the amount of stock shorted is equal to the equity in the account, essentially creating a short trade with a leverage ratio of one. So, the return on a short trade is:


( Stock Sale Price + Dividends Paid - Stock Purchase Price ) / Stock Purchase Price


The return is then converted to a percent. The app has no programming logic with regard to margin calls. This is because you are only trading a single stock and margin requirements pertain to total account equity.


5. Why do you separate out ETFs and Funds? What are they?


An ETF (Exchange Traded Fund) is a single security that trades on an exchange like the New York Stock Exchange. However, the ETF is essentially a basket of other securities (or even commodities). Thus, it is fundamentally different than a stock, which represents the fortunes of a single company. The ‘Funds’ we refer to are closed-end funds that also trade on the major exchanges, just like stocks. If these sound similar, they are, but there are important differences. Here is an article about closed-end funds. Here is an article comparing closed-end funds with ETFs.


We separate them out in our database because we think that this class of security has different price behavior than normal common stocks. If nothing else, they are frequently less volatile, acting more like market indexes as opposed to stocks. In fact, sometimes they are market indexes. Regardless of whether you agree that their price behavior is different, the securities themselves are different in a fundamental way. The “Funds” category often contains, bond funds as well as REITs.



6. Why can’t I just pick the stock I want to trade?


Because that is the worst kind of cheating - cheating yourself. If you have too much knowledge about the stock, then you will trade from memory (this is historical data) and you will trade very profitably, but that performance will not translate to real, live trading. Consider, for example, if you knew in advance that you were practicing trading a stock in early 2008? Almost regardless of the stock, you already know that during that time period, that stocks went down, a lot. This would create a bearish bias in your trading giving you a false sense of how well you can really trade. Consider the alternative - knowing very little about the stock, but watching the price/volume action tell you that it is a nasty bear market and trading short for that reason.



7. What is hindsight bias?


We use the term ‘hindsight’ bias to refer to trading from memory as opposed to using the technicals (or price/volume action) to make trading decisions. Since the app uses historical data, knowing too much about the stock is like having the answer key to a test. The results of the test will give you a false sense of how smart you are.


8. What is the survivor or survivorship bias and is it in your data?


The survivor bias refers to fact that failed companies are excluded from our data due to the fact that they no longer exist. Thus, our data only includes companies that have ‘survived’ up until now. Companies that have gone bankrupt, for example, will not be present in the data. There is little we can do about it, as our data sources exclude this data. However, as this database was initially constructed some time ago, it does contain a small subset of companies that either went bankrupt or, more likely, were bought by other companies and thus ceased to exist. Also, while this is a concern for making observations about long term trading (Buy and Hold strategies over multiple years), we feel the absence of this data doesn’t negatively bias short term trading - particularly if the trader in question likes to short stocks.


9. What is your data source?


Our data comes from freely available, reputable online data sources. We have scanned and filtered each prices series, searching for obvious inaccuracies and errors such as missing data, date gaps, missing volume, or duplicate records. In the event of an error, we excluded the stock from our database for that time period.


Furthermore, other factors contributed to a stock not being in our dataset. Stocks that have declined too much in price (think penny stocks) were excluded as were stocks with poor liquidity as measured by average volume.


10. How are the technical indicators calculated?


This page gives a detailed account of each indicator.

Questions? Comments? We’d love to hear from you. Contact Us