How to Minimize the Effects of Corporate Actions
By Dave Mabe
Yesterday, I answered a question about handling symbol changes.
This falls into the broader category of what I call "requiring perfect data versus actually making money."
You could spend a lot of time spinning your wheels architecting the perfect workflow that handles all the edge cases.
But a much easier approach is to design your trading strategies in a way that reduces the importance of corporate actions.
You won't eliminate their effect, but you don't need to.
Here's how you can make trading strategies where the effect of corporate actions is like a fart in a hurricane - they just won't matter that much.
Day Trade
The boundary for most corporate actions is overnight. If you're not holding overnight, then you minimize the effect dramatically. Even holding a trade overnight in your backtest makes it susceptible to distortion.
Use Shorter Term Filters
Similar to holding overnight, the longer the timeframe your filters are in, the more corporate actions will affect your strategy. For example, take two rules that you might apply to a strategy:
The stock must be X ATRs above the 50-day moving average
The stock must be above yesterday's high by a certain amount
The first one needs more accurate data and is more subject to distortion.
Add More Trades
One of the main metrics I look at is the number of trades per day in a strategy. Ideally, that number is as high as possible.
The overwhelming benefit of this approach is more total profit, but a great secondary benefit is reducing the importance of any single trade.
There's strength in numbers. Importantly, using more trades provides a more reliable path to confidence.
Do you want to be statistically perfect, or do you want to make money?
-Dave
P.S. Do you wish you had a column library that would tell YOU how to make your strategy profitable? My column library is now included with MabeKit.
Here's what one trader said about it:
"Access to the MabeKit library has been a game-changer for me. More columns, plus faster optimization has meaningfully accelerated how I develop and validate strategies." - Nash