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Clear As Mississippi Mud

Don Dawson

Unfortunately this is the case when it comes to charting the Futures markets.  One of things I like about the Equities markets is that their charts are very easy to create and there is no ambiguity.  The main reason for this is because they are not like a Futures contract that expires.  Equity prices plot the same prices on a chart until the company is acquired, delisted from the exchange it trades on, goes out of business, etc. A Futures contract however does have expirations to deal with and this is where charting can become very subjective.

There are several ways to plot any one Commodity Futures contract, as I will list:

  • Contract Month and Year Specific
  • Continuous Contract  – Adjusted
  • Continuous Contract – Unadjusted
  • Continuous Seasonal Contract
  • Day Session Only
  • All Session
  • United States, European or Asian Sessions Individually

Now compare this to an Equity chart of creating only one type of chart with none of the above to deal with.  Perhaps you can start to see where the expression “Clear as Mississippi Mud” comes from when a trader begins to chart Futures markets.  My goal in the next few paragraphs is to help clear up some of this mud for you.

I am going to focus on using continuous unadjusted charts.  I have written articles in much more detail about the differences between adjusted and unadjusted charts in the past.  I’ve also written about contract specific charts which always have a first trading day and eventually expire resulting in a last trading day.  This article will focus on setting up your continuous unadjusted charts.

The first thing I would like to address is which type of chart a trader should use to plot longer term supply/demand levels from.  From my past articles you know that my preference for these levels will always be the contract specific chart first then if I needed additional information I would then use a continuous unadjusted chart.

The reason for using the contract specific chart to plot my supply/demand levels is that the prices you see on these charts are actual prices the current contract has traded at.  Meaning there have been no adjustments made due to contract rollovers (contract expirations) or price scale adjustments for adjusted charts.  This has been my rule for trading Futures for some 24 years.  But like life the markets change and we must adapt or become sacrificial lambs to the masses who do adapt to these changes.  Electronic trading has created all kinds of grey areas when it comes to Futures charting and this is one of the times I have to make some new rules to properly chart the Futures markets.  In a recent article I wrote about how our left and right brain must work in unison so as not to suffer from hesitation or lack of confidence when it comes time to place a trade.  To resolve this battle of the two minds for me I had to create some rules in my trading plan.  I am going to share these rules with you now.

Figure 1 is a contract specific chart of the Ten Year Treasury Futures contract that trades on the CMEGroup exchange.  I used the Ten Year Treasury Futures contract, but if you create a chart for any Stock Index Futures or Currency Futures you will see the same pattern.  Recently the volume rolled over from the March contract to the June contract.  As you look at Figure 1 notice how the price action in the yellow box of the chart is very spotty and illiquid.

Figure 1: Contract specific chart of the Ten Year Treasury Futures

The blue box shows the market after more liquidity came to this contract.  The problem is the Federal Reserve has not made any major changes to their interest rate policy in so long that interest rate markets have not had much price movement.  Keep in mind that the Federal Reserve only changes short term market rates and the longer term rates are market determined.  This is the first time I have seen a rollover with such a small range on a daily chart, and for this reason I began to research and see what my options were. You can see that if I were to use my rule of only contract specific charts for my supply/demand levels that I would be out of data points if the Ten Year Treasury Futures move up or down by any significance.  This is very typical with all of the financial markets (Interest Rates, Currencies and Stock Indexes).  The financial Futures have very little trading activity in their back months (the front month always has about 90% of the daily volume traded).

I recently called around and talked with some of my professional trader friends and asked them about this situation and how they would handle it.  The consensus seemed to be that they now view the financial sector differently than the other Commodity markets.  As a comparison let’s look at Figure 2 of a contract specific chart of December 2012 Corn.

Figure 2: Contract specific chart of December 2012 Corn

Figure 2 is the same duration (last 12 months) as Figure 1, but notice how much more liquidity there is in this chart than there is in the Ten Year Treasury chart.  For this reason a trader could easily use a contract specific chart of Corn Futures and get much more accurate supply/demand levels than any continuous chart.

The biggest difference in these two charts is that the Corn market has much more commercial (processors) activity involving buying and storing this Commodity for future delivery at some point.  There are also commercial producers hedging their anticipated needs for upcoming planting/growing seasons. All of this trading is done even before the December contract becomes the front month.

My new rule for charting Futures is this:

Always use a continuous unadjusted chart for identifying supply/demand levels for any financial product.  These will include Stock Index Futures, Interest Rate Futures and Currency Futures.  For Commodity Futures I will use the contract specific chart to create my supply/demand levels.

Figure 3 will show a chart of a continuous unadjusted Ten Year Treasury Futures contract.

Figure 3: Continuous unadjusted Ten Year Treasury Futures contract

Notice the difference in the candle patterns how they show much more liquidity and have very well defined supply/demand levels.

Now that I have shown you the proper chart to use you need to understand how to set your computer up to plot these continuous unadjusted charts.  To do this you will need to enter a different symbol for each financial sector you trade.

When dealing with a continuous Futures chart of any type we must specify when to quit plotting the old contract data and begin adding the new contract data to our continuous chart.  To do this we simply change the Futures symbol format for Trade Station (if you use E-Signal they do this automatically with a continuous chart).

The symbol we will use will tell the computer when to start and stop plotting this data.  Here is an example of the Nasdaq Futures market.  The symbol would be @NQ=107XN.  We are mostly concerned with the digits after the = sign.  107 will tell the computer to roll the Futures contract to the next contract month 7 days before the contract actually expires.  Since all Futures contracts do not expire on the same day we must know how to set these symbol variables to each financial sector.  I will list them below for your convenience and to allow you to create much more accurate Futures charts.

The Stock Index Futures (United States only, European markets use a different number) will use the @ES=107XN (ES was used as an example only, substitute the market you are trading).

The Currency Futures markets will use @EC=103XN

The Interest Rate Futures markets will use @TY=114XN

These charts will adapt each financial Futures sector to the proper alignment of their contract expiration dates.

Trading is very much an art rather than a science, but with the proper knowledge and practice we can create a rule based strategy that will make both the left and right brain happy.  This will result in much more confidence entering and managing our trades.

“A handful of patience is worth more than a bushel of brains.” Dutch Proverb

Trade with an open mind!

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.