A quantitative trading strategy may use market data—prices and trading volumes—to look for predictive signals. Before modeling, the data must reflect what actually happened in the market, including corporate actions and securities that later disappeared. section 10.2.1
Three details can change the meaning of a signal:
- Adjust prices for stock splits, dividends, and rights offerings. Otherwise, a split can look like a sudden crash. section 10.2.1
- Include bankrupt and delisted companies in historical tests. Excluding them creates survivorship bias and can make a strategy look more profitable than it is. section 10.2.1
- Choose a representation that preserves the needed information. Candlesticks show open, close, high, and low prices; closing-price line graphs simplify trends but omit intra-period detail. section 10.2.1
