V.17:8 (335-342): IBM, Cubed by Dennis Meyers, Ph.D.

V.17:8 (335-342): IBM, Cubed by Dennis Meyers, Ph.D.
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IBM, Cubed

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 generatedbyathird-degreepoly-nomial 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).

DATA DISCUSSION 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.

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