Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

PITFALLS OF MECHANICAL TRADING SYSTEMS

Data Integrity Issues Revisited

To understand the performance tables presented throughout Chapter 3, I discussed two specific data integrity issues: methods of accurately backtesting futures contracts (which accounted for contract expiration issues) and point value versus percentage changes in the data history. Here I merely reiterate their importance in maintenance of data integrity. If either of these issues is germane to readers' data history, please review that chapter.

The next data integrity issue that must be addressed is the accuracy of data. This issue is an absolute prerequisite for developing any meaningful conclusions regarding the success or failure of a particular trading system both now and in the future, and yet this problem is often neglected and/or assumed away.

For most high-end data vendors covering exchange-traded instruments, the problem commonly known as bad ticks has steadily improved over the years in terms of both severity of occurrences and speed at which these erroneous data prints are fixed. Because the ability of each data vendor to handle these issues varies over time, I want to reiterate that accuracy in this area is an unyielding prerequisite for system developers, and it is the one aspect of system development in which superior quality must override any and all cost concerns.

The other issue regarding bad data pertains to non–exchange-traded instruments. It is no accident that with the exception of the extraordinarily ...