In this article I look at the differences between paid, good quality stock market data and free end-of-day stock data.
When designing and building trading systems it is crucial to have reliable and clean end of day stock data. I use Amibroker to chart and back-test trading systems but no matter what platform you use, common sense dictates that you must have good data. If you don’t, you can never be sure if your system is telling you the truth.
Norgate Premium Data is my vendor of choice and a free trial is available for new users. Premium Data can be used with a range of trading programs including Amibroker, TradeStation, MetaStock, Trading Blox, Guppytraders and OmniTrader. Data is available for a number of different markets including stocks, futures and forex.
What’s wrong with free stock data?
Poor data has many holes and discrepancies. This means that the system you build will be based on false assumptions and will likely lose you money when you trade it live. If you don’t have accurate data you will build a system based on false patterns and find an edge that really doesn’t exist. It can also mean that you trade on incorrect signals.
Overall, it’s just not a very good idea. And the cost of acquiring good quality data easily pays for itself in trading profits.
Free sources of end of day stock data
There are several sources for free end of day stock data, the most common being Google, Yahoo! and MSN. Yahoo! has been providing free end of day quotes for some time now and is commonly used. Amibroker even comes with a free tool called Amiquote that imports Yahoo! data straight into the program.
However, as we shall see, there are clear reasons why you should avoid using free data to build trading systems and test trading ideas.
One reason why free data is inferior to paid data is that the data often is not adjusted correctly for corporate actions such as stock splits, dividends and mergers. In many cases, this data must be back-adjusted by experts, after the action has taken place.
Example 1: Celgene Corp $CELG
In this example, free Yahoo data is has been downloaded and is shown on the left. The paid for data from Premium Data is shown on the right. As you can see, the free data shows the stock Celgene to have fallen sharply at the end of June. This would have given a trading system a massive false profit from a short position or a huge false loss from a long position.
However, the data is incorrect. It fails to take note of the stock split which occurred on the 26th June. The chart on the right uses data from Premium Data and shows the correct price chart, adjusted for the split.
Example 2: Enterprise Products $EPD
It’s a similar story for $EPD. The Yahoo data on the left has not been adjusted for the reverse stock split, whereas the true price chart is shown on the right.
If your system bought EPD in August using the Yahoo data it would be showing a profit of over 100% and that would skew your trading system results by a huge margin. In reality, the profit from the trade would be nearer to 10%.
Example 3: Citizens Holding Company $CIZN
In this example, it’s less noticeable. But there are still differences between the two price charts. For example, the free data on the left suggests that the stock never touched the $19.60 level, whereas the Premium Data shows the stock almost hitting $20 a share.
This may not seem like a huge deal but it is. Little differences like these can decide whether an indicator shows a trade signal or not. And small inconsistencies can affect your peace of mind when you trade, giving you less confidence to stick to your plan.
Example 4: AGL Energy $AGK.AX
Anomalies really become more common when you look at smaller companies and foreign shares. The chart of this Australian share has a lot of differences when compared to the premium data on the right. If you trade small cap stocks or non-US companies it’s even more important to use good quality data sources.
Example 5: Templeton Emerging Markets $TEM.L
Likewise for this UK stock. The free data from Yahoo has lots of gaps and there are a number of price fills above the market which have no high, low or close – just an open price. I found a number of these and the problem seems particularly bad for UK small companies.
Example 6: Meggitt Plc $MGGT.L
Here’s another one for the UK company Meggitt Plc. The erroneous spikes on the chart in 2011 and 2012 can be dangerous when designing a trading system as you can’t reasonably expect to ever get filled at these prices. Instead, the erroneous levels cause the trading system to be skewed.
Free Vs. Paid – Back-adjustments
One of the problems with free data like Yahoo! is that it is somewhat reliant on users flagging up erroneous prices. Users encounter errors and then email Yahoo! who then adjusts the data.
This means that even if a price chart looks OK now, it may not have been correct at the time it was originally updated. And this is usually the time you need the price data to be correct (because this is when you make trades – in the present).
Serious data providers have whole teams dedicated to keeping data accurate. As you can guess, using clean, reliable, end-of-day stock data is always going to be preferable when trying to build a robust trading system.
Norgate Premium Data
It’s for the reasons mentioned above that I use Norgate Premium Data for all of my trading systems. Norgate is a licensed data provider for stocks, forex, and futures with a long history of excellence.
I am an affiliate for Norgate but I only recommend the service because I use it myself with and have been impressed with the packages available. I use Amibroker and update my database once a week with Norgate’s data updater. The whole process takes about ten minutes and I’m then ready to run my screens and test trading ideas.
The stock data is adjusted for all capital-related corporate actions – splits, reverse splits, capital returns, special dividends, stock dividends, demergers and spin-offs and Norgate uses the same methodology as index providers (such as Standard & Poors) for benchmark indexes such as the S&P 500.
Recently, Norgate introduced a new ‘Historical Constituents’ database where you can quickly and easily see which US stocks were delisted from the major exchanges. This is an excellent tool and means you can remove survivorship-bias from your trading systems and take your trading to the next level.
This is still being rolled out but if you email Premium Data support they will let you in on the program.
Never Looked Back
Since signing up with Premium Data, I really haven’t looked back. My trading has improved immensely and the difference in trading results (free vs paid) is incredible.
Right now, you can get a free trial with Norgate, so you can test out the service.
I highly recommend you give it a look. See if the service is right for you, whether it can help your trading and if it works well with your platform.
Good luck and thanks for reading.
Thank You For Reading
Joe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.
This post expresses the opinions of the writer and is for information, entertainment purposes only. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided. Past performance is not a reliable indicator of future returns and financial trading is full of risk. Please read the Full disclaimer.