Statistics  |  SEP 1998

Using Percentage-Based Back-Adjusted Data by Enrico Donner, Ph.D.

A continuous data series for remodeling a futures trading system can be created in a number of ways. Here's a new method that uses a percentage-based back-adjusted technique to ensure that profits and losses from a trading system are equivalent over time on a percentage basis. As a rule, the results of any trading system are evaluated in terms of dollar returns. This means that a $10,000 loss on the Standard & Poor’s 500 futures contract is considered simply to be a $10,000 loss, without taking into account the period in which the loss has occurred. As an example, in August 1982, the S&P was trading around 110 points (Figure 1), at a face value amount of $55,000. At that time, assuming a single point of the S&P contract was the equivalent of $500, a $10,000 loss meant an 18.18% loss expressed in terms of percentage returns. On the other hand, 15 years later, in August 1997, the same $10,000 loss would have turned out to be a 2.10% loss (the S&P was trading around 950 points, or at a $475,000 face value). The 20-point loss that would have been defined as just a bad trade in 1997 would have destroyed your trading career in 1982.

by Enrico Donner, Ph.D.