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Back-adjusted, Continuous contracts - best for support and resistance?
@DarkPoolTrading: If you look at a 20-day period which includes a rollover date and study aggregate volume data, then you need to use the old contract prior to the rollover date and the new contract starting with the rollover date. If you did otherwise, there would be insufficient liquidity during one of the subsections of the 20-day period and you would not get an accurate composite volume profile.
In order to obtain matching price levels for the old contract and the new contract volume, it is in my opinion necessary to use backadjusted contracts. There is no difference, whether you use them in real-time or with hindsight, as the volume profile remains the same.
That's what I gathered from the thread but rollover, continuous contracts, back adjustments, etc have always made my head sore. I just don't like looking at data that is not accurate,...so the thought of back adjustments doesn't quite sit well.
However it makes sense what you're saying. Thanks.
Mike, For S/R reads, I use a cash chart for any period that spans more than 1 contract term. I believe that carrying cost effects are muted as compared to a future or ETF product. I still believe that the cash price is fuzzy due to the influence of index arb trade, just less fuzzy. I consider S/R areas to be larger and then go to a single contract chart to look for setups inside that area.
I use a non-adjusted, session-only daily futures chart to look at longer term profile and non-rollover gaps. For longer aggregations, its close enough.
In a related subject, I exclude the day's settlement period, because it seems to me that the cash close is more responsive.
Cash charts are fine for products for which cash charts are available.
However, non-adjusted futures charts are not very useful. That is precisely the reason, why nearly all charts that cover several contract periods are adjusted. The main problem with non-adjusted charts is that the rollover gaps do not make sense. After all cash charts do not have rollover gaps and the rollover gap only results from
-> financing costs / dividend payments (cash index futures)
-> financings costs (futures derived from a total return index such as the FDAX)
-> storage costs / financing costs (physical commodities)
Hence the need to eliminate the rollover gap. This can be achieved in two different ways
-> eliminate all financing costs, projected dividends and storage cost in a single step on the rollover data (=mergebackadjusted contract)
-> spread the costs over the entire lifetime of the front month contract (=continuous futures contract)
The first solution leads to a contract that can be backtested, as it accurately depicts trading results.
The second solution leads to contract prices, which are mostly built from fractional ticks and which cannot be used to reflects actual trading profits. However, the absolute values of the contract price will be more or less correct in the longer term.
I'm curious people's thoughts on just using the non continuous, non back-adjusting contract month chart to trade off of. As the volume rolls over to the next contract, just switch the chart over to the next contract.
Are levels in the previous contract month going to be more important than existing levels in the now more heavily traded contract month? For example on the NGJ21 chart, non continuous non back-adjusted, the low put in on Friday 3/12 is 2.584, one tick from the swing low put in on Friday 1/29. On a continuous, volume-based back-adjusted chart, the 3/12 low lands in the lower end of a choppy consolidation area from early/mid February. The bottom of that same consolidation from early/mid February on the non continuous, non back-adjusted chart was tested in late February, acted as support, then broke down in early March. It would seem that the top of that consolidation from early/mid February was supportive in late February on the continuous, back-adjusted chart, then broke down in early March.
When it comes to short term trading, does it really matter what chart is being used or what levels we are using? It seems that we will always be able to find some sort of level using volume, time, swing highs/lows, support/resistance, Fibonacci, etc. that will have some sort of "significance" to give us confidence to put on risk. Does chart selection really matter?
Something else I’m curious about is how you all are treating gap fills when it comes to choosing charts. Natural gas is constantly gapping up or down on the Sunday open. A lot of time the gap will get filled on the non continuous, non back-adjusted chart, yet will still be unfilled on the continuous, back-adjusted chart. Is there still a gap? Just a thought while cruising through old threads.
