December 7th, 2012
Online Trading Academy Article of the Week
Some Things Are Out of Our Control
by Don Dawson, Online Trading Academy
As many of you know, when it comes to charting a Futures market using a continuation chart there are many possible ways to do this. If a Futures contract always had the same amount of volume traded from the first trading day (FTD) to the last trading day (LTD), things would be much simpler. Unfortunately that is not the case and we do have to deal with this for every Futures contract traded.
When a Futures contract starts trading on its FTD there is very little volume for many months. This illiquid environment can cause distortions in our charts. If we look at charts during this time we will see many dots and gaps, a sure sign this market has no volume trading in it yet. As time goes by and the contracts before this one start to expire the volume from the expiring contracts trickle down to different contract months, thereby providing more liquidity. The charts start to take on a more liquid nature and we start seeing more full bodied candles instead of the dots and gaps. Eventually this particular contract will become the near month (contract with the most volume) and the majority of speculators for this Commodity will be trading in this particular month. As more time passes this Futures contract will come to its expiration or LTD. Shortly before this contract approaches it’s LTD market participants will begin trading the next Futures contract month in the cycle also known as a rollover. This is how the life of all Futures contracts evolve from their FTD to their LTD.
Due to these contract expirations and low liquidity in the back months a chart of just the specific contract month itself can create some problems for traders who are looking for detailed technical analysis. To help eliminate this problem Futures charts can be spliced together at each Futures contract expiration. The result is a chart that appears to be continuous when we look back in history. The only restrictions the trader faces is when the actual Futures market actually started trading. For example, a continuous chart of the E-mini S&P only goes back to 1997 because that is when it started trading. Other Futures markets can date back to much earlier times in history.
As a trader and instructor for Online Trading Academy I am always looking for ways to help simplify this sometimes ambiguous task of charting continuous Futures market contracts. While at the same time only sharing with you information that I know to be correct or as in this case if I am wrong then I need to change it immediately. In a recent article I wrote, Simplifying Continuous Futures Charts I mentioned a symbol that I thought was going to help new Futures traders.
The symbol was used for un-adjusted continuous Futures charts. Un-adjusted charts are charts that no changes are made to the price scale for either the previous or current chart being added to the continuous chart. Trade Station charts have a chart symbol that is supposed to rollover our charts automatically whenever the volume of the contracts actually change from near month to back month. This is exactly how a Futures contact rolled on the trading floors around the world, making this type of rollover the most accurate you can get. As you can imagine this would make life so much easier for traders because the chart would roll consistently each time they needed to. The symbol for this continuous contract looked like this:
Using the above symbol the only thing a trader would have to change would be the root symbol for the Commodity Futures they were charting. In this example I used US (30 Year Treasury Bond). If the trader wanted to see Sugar (SB) they would simply use SB in place of the US and leave everything else as it was in the symbol. Simple right?
I thought so too, even after doing some back testing to verify this symbol for correctness. Since most continuous chart problems arise around roll over times those were the areas I focused on for back testing. As I kept observing the symbol I started noticing some discrepancies. First the letter “N” in the symbol represents an un-adjusted chart style. When I viewed certain Futures markets I noticed that the charts were in reality adjusted charts. This was causing the charts to show candles trading at prices we had never seen before in that market. Then I started seeing random days where just one candle was not the correct high or low. I know this sounds petty, but when I put my money on the line to trade or instruct a class I want things to be perfect.
I contacted Trade Station and spoke to their Data Integrity department. I asked them about these issues and I was informed that they were aware of the problem and that it is to be resolved in a later version of the platform. Personally I would not have the symbol available if it did not work, but it is available and my job is to make you aware of it. One thing I might suggest is that for all of you using Trade Station to trade Futures with is to write an email to your representative or Data Integrity and request they fix this as soon as possible. With more people requesting the change then the sooner the issue will be resolved.
What does a trader do to see a continuous un-adjusted Futures chart on Trade Station? There is another symbol you can use, but unfortunately the variables in the symbol can be different for certain Futures contracts. In another article I wrote “You Can Keep Having Fun, But You Have to Leave Here,” where you will find out how these variables were determined in more detail.
The next best symbol for an un-adjusted continuous Futures contract is:
@ = Continuous Chart
CL = Root Symbol of Commodity Future Market
1 = Roll to next contract month in cycle
03 = Day to roll data before contract expires
X = Until Expiration
N = Un-Adjusted style
While this symbol works very well it has one short fall. Some Futures markets do not rollover the same number of days at each expiration, they can vary by +/- 1 or 2 days. In the above example I use Crude Oil (CL) and the software will roll the chart over to the next contract in the cycle 3 days before the front month expires. Sometimes CL might rollover 4 days or maybe 2 days before the contract expires. For our larger timeframe charts this does not create too much of a problem. For your shorter term charts 5 or 10 minutes for example, you could see a bigger disparity in your charts.
If Trade Station can resolve the problem with the automatic volume rollover symbol we will have charts that are rolled over precisely like the trading floors do. Until then the best that we can do is use the symbol where we insert the number of days before the expiration for each contract.
Table 1 is a list of Futures contracts and the number of days recommended to use for your un-adjusted continuous charts. Make sure to use two digits in the symbol for the number of days. Example “03″, not just “3″
These numbers will get your charts rolled over at the proper times to make your charts more consistent to what other traders are looking at who use different chart packages.
The mystery of finding a uniform continuous chart symbol still eludes the Futures industry. Fortunately everybody has the same problem and in the mean time we will continue to look at a multitude of different styles of charts. For now I can only say it is important that you find a chart style that works for you and stay with it. Trying to incorporate all the different types of Futures charts into your trading will lead to paralysis of analysis.
“The key to change….. is to let go of fear.” Rosanne Cash
Read more by this Author
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- Helping push you closer to the 'edge'.
- Goal Setting - As Important as your trading plan
- Commodities and ETFs
- How to Handle Futures Contract Rollovers