November 9th, 2012
Simplifying Continuous Futures Charts
Is that possible? I have written many articles about charting Futures contracts and the issues facing traders with continuous charting. Charting a market that has expirations is bad enough, but charting markets without an industry standard is really challenging. It is beyond me why the Futures industry charting platforms have not standardized the way we build charts. The reason I would want this is for obvious reasons for traders who rely on accurate and reliable support (demand) or resistance (supply) levels.
Let’s face it, when we place our orders to buy or sell at our levels we need a lot of other people with big orders to be in that same area as us or the market is going to rush right through our level into our awaiting stop. With so many different types of charts available to Futures traders:
- Contract Specific
- Adjusted Continuous
- Un-Adjusted Continuous
- Continuous Nearby Contract
- Continuous Contract Specific
Is seems impossible to have enough traders who can make a difference in market direction with their trading size looking at the same area we might be. Look at an Equity chart. There is only one type of chart because there is no expiration to deal with. Equity traders have small, large and institutional traders all looking at the same charts. So when a level is created in the market there is a good bet there will be sufficient shares of Stock bought or sold to impact the market. Same goes with the Spot Forex, the charts are seamless with no interruptions. While we have tried to make Futures charting relatively easy to understand and use, the Futures industry has a long way to go in standardizing this issue.
So anytime I can find a way that might help somebody better understand Futures charting I am more than happy to share it with them. Here is one of those ways I feel will help many traders.
My personal preference of continuous Futures contract charting is using an un-adjusted charting style. These charts have no adjustments made to the price scale during contract rollovers. For traders who create levels of support (demand) or resistance (supply) these un-adjusted charts reflect prices that a previous contract of a particular Commodity Futures actually traded at. Thereby making levels more accurate.
Usually there is a gap associated with these rollovers because of the different prices of each Futures contract month. Sometimes the next months price is higher and the gap is up. Other times the next months price is lower and the gap will be down. These rollover gaps are treated just like traditional gaps and have a very high probability of being filled at some point in the future.
To obtain these un-adjusted charts using TradeStation we have to use a charting symbol that lets the chart software know when to discontinue plotting price data of an expiring Futures contract. And begin to plot the data of the new contract with the most trading volume (front month).
A popular way of creating these charts is by using symbol specific letters and numbers to let the software know when it is time for changing market data. A typical symbol might look like:
@ = Continuous Chart
LC = Root Symbol of Commodity Future Market
1 = Roll to next contract month in cycle
20 = Day to roll data before contract expires
X = Until Expiration
N = Un-Adjusted style
While this symbol will give the most accurate rollover dates to the software the user has to calculate each Commodity Futures contract to figure out how many days to use for days until expiration. While some Commodity Futures share the same number of days many do not. In a recent article I wrote, You Can Keep Having Fun, But You Have to Leave Here, I explained how to calculate these days.
Whenever a Futures contract rolls over from one contract month to the next it is based on the volume of the two contracts. Once the volume leaves the front month (due to upcoming expiration) it usually goes to the next contract month in the cycle. Once this occurs the month with the highest volume immediately becomes the new front month. It is at this point that traders need to begin plotting the new front month prices onto their continuous charts.
On the trading floors this is exactly how a contract rolls over. Once the volume being traded in a contract becomes larger than an upcoming expiring contract the traders change contract months on the steps where they stand. This is an official Exchange rollover. No matter what market we trade until the market participants decide it is time to move the majority of volume to another contract then we stay put. The only market that consistently rolls over at every rollover are the Stock Indexes. All the other markets can vary by +/- 1 -2 trading days at each rollover. Yet another inconsistency in the Futures industry, but I will leave that soap box for another article.
“It’s impossible” said pride. “It’s risky” said experience. “It’s pointless” said reason. “Give it a try” whispered the heart.”
Read more by Don Dawson
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About the Author
Don has been trading the futures markets since 1987. His perseverance through the ups and downs of trading, openness to experience of others, balanced tolerance for risk and patience to wait for his setups are a few of his strengths as a trader.
Don obtained his series 3 license in 1990. Soon afterwards he registered as a Commodity Trading Advisor with the National Futures Association and formed his company Majestic Futures. He has been a guest speaker on Technical Analysis at Johns Hopkins University and a guest speaker on the Business of Trading Radio Show in Washington, DC.
He continues to actively trade his personal account on a daily basis when not teaching for Online Trading Academy. His teaching method has been referred to as “down to earth”. He understands the student’s need for a structured environment in the early stages of their trading education. He uses humor to convey information in an accessible way.
He is excited about sharing his passion for trading with others. A quote he likes is “A candle loses nothing by lighting another candle.” He is now looking for a balance in life between trading and teaching others what he has learned from his many years of trading. He acknowledges that the best teacher is a student – always in learning mode and wanting to learn more by teaching. He looks forward to working with each of you in one of his classes. He is also writing articles for Online Trading Academy’s free newsletter “Lessons From the Pros” and hopes students find this a valuable resource.