Hereís a look at whatís involved in developing a
trend-following indicator for trading IBM.
In a previous article, I showed
how the application of a curve
could be used to develop
a system to buy and sell British
pound (BP) futures. This time,
we will use a variation of that cubed system to create a system to trade IBM.
IBM, one of the premier computer corporations in
the world, is a major factor in the movement of the
Dow Jones and Standard & Poorís 500 indices.
Although IBM is traded on all regional exchanges, the
lionís share and real market of IBM is traded on the
New York Stock Exchange (NYSE).
We will use the daily prices of IBM from January 1,
1993, to December 31, 1998. IBM pays dividends on
a quarterly basis, usually on the dividend payable
dates of March 10, June 10, September 10, and
December 10. On the exdividend date, the price of
the stock is adjusted down by the value of the dividend.
Thus, over the space of a year IBM has a small
downward bias in price by the amount of the yearly
dividend.Ifyou wereaholderof IBM,thenyouwould
receive those dividends in cash, and the small downward
bias over the year would be made up by the cash
dividends you received. However, in developing a
system using IBM prices,those pricesarenotadjusted
for the dividend payments. This nondividend adjustment
creates a small distortion in parameter selection
and walk-forward results, which should be noted but
does not significantly affect the system.