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I am backtesting a number of trading strategies using a feed of unadjusted data from Factset. Before I run the backtest my routines adjust the data for splits and for special dividends.

One question that has come up is should I also be adjusting the data for dividends as well? So far I have seen 3 arguments:

  1. Yes you should adjust.
  2. No you shouldn't adjust as technical analysis algorithms will be using incorrect data.
  3. You shouldn't adjust while generating opening and closing positions but should adjust for working out total return

I'd be grateful for any thoughts on the matter.

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Your return calculation should be on total return, i.e. include dividend income. Your signal, if it is price only, then you should take the price series and not adjust.

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  • $\begingroup$ Yes, in some cases you may need both: Total return to compute trade outcomes, unadjusted prices to compute trade entry signal. $\endgroup$ – Alex C Apr 16 '16 at 1:07

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