I was looking at the recent Forum post by Shawn (‘scrichley’) about Mean Reversion: “QQQ mean reversion coding question.” What woke me up was the fact that when I tried to run a Sim based on Yuval’s settings, and I realized there is a critical selection that seems to no longer be available for “Price for Transactions” under the ‘General’ tab. Unless I’ve been living in a parallel universe and took the wrong off-ramp, didn’t we formerly have the following price option available for Sim transactions?
High + Low + (2 x Close) ÷ 4
DID I MISS SOMETHING??? Now all I see are these options:
• Previous Close
• Next Average of High and Low
• Next Open
• Next Close
I have run an investment advisory website based on quantitative/algorithmic investing for the last 23 years, and since 2003-2004 have used Portfolio123 for my testing and portfolio-management needs (with an ‘Ultimate’ membership) because I was able to most accurately test and operate strategies here. I hope that hasn’t changed!
We recommend in our ‘Best Practices’ article for clients, and it is a generally accepted Best Practice in the ETF industry that buyers and sellers of ETFs should avoid the opening and closing hours, due to the increased price volatility of constituent stocks during those hours. An ETF’s price represents the prices of dozens, hundreds, or thousands of individual companies, depending on the ETF. Those individual equities can have wide price swings and wide spreads during the opening and closing hours - a time when stock volume and volatility are at their highest, largely because of the increased activity of prop desks and day traders. Because of these extremes, at the open and close, ETF prices are (at best) an approximation of the accurate price.
To reflect this advice, my models have always used this formula (available in P123) to best reflect a mid-day price: High + Low + (2 x Close) ÷ 4
It now appears that option is no longer available to us in Sims. Can I ask why? Did I miss an announcement?
I don’t know when this setting was removed, but of the six live strategies I currently offer at ETFOptimize.com, there was only one transaction this past Monday. When I calculate the price recorded for SSO on Monday, November 30 ($139.72) in the Live Portfolio version of my ‘S&P 500 Bull/Bear Strategy,’ it appears to be calculated using the formula mentioned above, which gives a heavier weight to the Closing Price than it does the High and Low prices.
So, if the prices used for transactions in a LIVE Strategy are still based on the regular formula (High + Low + (2 x Close) ÷ 4), why has that option been removed from the transaction options in Simulations? Aren’t simulations intended to provide us with accurate representations of Annualized Return and Max Drawdown (i.e., Proof of Concept)? If we can’t price transactions in our Sims to accurately reflect the prices obtained in Live Ports, hasn’t that removed a significant advantage of P123? Thank you.