This continuing decrease (increase) of the relative importance of historical
moves in an up trend (down trend) and markets that are traded at a premium (dis-
count) is the main disadvantage of the point-based back-adjusted contract. For
instance, if the 26.8 percent drop—as implied by the back-adjusted contract—
were to be used to calculate the dollar value of the drop from the actual top of 333,
we would come up with $22,311 (0.268 * 333 * 250) instead of $38,000 (0.456 *
333 * 250). Therefore, to keep the relative importance of all historical moves con-
stant, these moves must be viewed in percentage terms.
In an article for Futuresmagazine (“Data pros and cons,” Futures, June
1998) and later in a second article (“Truth be told,” Futures, January 1999), I sug-
gested that a better way to adjust a spliced-together time series would be to use
ratio adjustments rather than points or dollars. In doing so, this new time series
will also vary in levels when compared to where the true contract was traded, but
instead of keeping the point- or dollar-based relationship between two points in
time intact, the percentage relationship will stay the same.74 PART 1 How to Evaluate a System
FIGURE 6.8
October 1987 using ratio adjusted data (RAD).