Lessons from the Pros


Futures Charting – Write Your Congressman!

Well, maybe we don’t have to take it to this extreme. But if there is one thing I wish the Futures industry would do is that they would standardize the charts we use to make our trading decisions. So much confusion comes from having so many types of charts available to Futures traders:

• Un-Adjusted Continuous Charts

• Adjusted Continuous Charts

• Contract Specific Charts

• Contract Specific Continuous Charts

• Regular Trading Hours (RTH) Charts

• All Session Charts

And the list goes on into the intra-day charts that are available to Futures traders.

The Equity and Spot Forex markets have some of the best looking and straight forward charts in the investing community. In all fairness to the Futures industry these other asset sectors do not have contract expirations to deal with. Until the brains of the Futures industry come up with this type of chart I guess we will have to make due with what charts we have.

I received an email recently from a student asking about which chart to use around rollover time. While there have been previous articles written on this topic I thought another article about the Financial Futures markets charts would be helpful to clear up any confusion.

Most new Futures traders gravitate to the Financial Futures contracts when they first start trading Futures. These contracts include the Stock Indexes, Interest Rates and the Currency Futures. Once the new trader understands these instruments then they gradually start to trade the physical Commodity Futures contracts.

Some of the benefits of trading Financial Futures first are:

1. Almost 24 hours of trading during the week

2. Contract expiration months are all during the same period (March, June, September & December)

3. The same economic reports that impact Stock prices typically impact the Financial Futures markets as well

4. Liquidity during the night session is better and reduces the amount of slippage when your protective stops are triggered

The next thing to figure out is which chart to use while trading these vehicles?

My answer has been and always will be, it doesn’t matter as long as you use the same type of chart for “all” of your analysis. The last thing you want to do is use different charts for your analysis. I have seen many times when Futures contracts rollover traders want to switch their chart types temporarily around this time. I personally think this is a big mistake.

From a personal preference I always use un-adjusted continuous charts for all of my Financial Futures contracts. There is never a time when I use a contract specific chart (example USM14, ESM14 etc.) when trading Financial Futures. Of course this is just my personal preference and each trader needs to define their own style.

Some of the reasons I have chosen this style are due to the length of the contract life. All Futures contracts have a First Trading Day (FTD) and a Last Trading Day (LTD). The difference between these two dates is the life of the contract.

Physical Commodity Futures have much longer life of contract times. For example Crude Oil trades for about 6 years before expiring, Corn trades for 3 years before expiring. During this time there is a lot of Commercial trading activity in each contract even before it becomes a near month with the highest volume traded contract.

Financial Futures on the other hand only trade for 1 or 2 years before expiring. The mini S&P trades 2 years, Euro Currency trades 2 years and the 30 Year Treasury (US) market only trades for 1 year. As if the short life of contract is not bad enough the majority of the volume traded in these contracts is done in the near month (approximately 95% of entire volume for all contracts).

With little volume being traded in the forward months the charts do not have full bodied candles and a tremendous number of gaps each day. The volume finally comes to the contract during the last 3 months of the life of contract. This makes using a contract specific chart very difficult to create our supply/demand levels.

Figure 1, 30-Year Treasury market, illustrates the poor chart quality until the last 3 months of the contract life. Notice how the volume expands during the last 3 months of the contract life. This type of chart is referred to as a contract specific chart.

30-Year Treasury marketFig 1

Fig 2 is a chart of the same 30-Year Treasury market using an un-adjusted continuous contract setting. Notice how the volume is consistent across the chart. This is because the software only plots the near month with the most volume when plotting un-adjusted continuous charts.

30-Year Treasury market using an un-adjusted continuous contract setting Fig 2

Figure 3 is a contract specific chart of the Euro Currency. This chart also displays the low volume of the contract until the last 3 months of the life of the contract, making this chart difficult to create supply/demand levels as well.

contract specific chart of the Euro CurrencyFig 3

Figure 4 is an un-adjusted continuous chart of the Euro Currency contract. Again notice how the volume is consistent across the chart.

un-adjusted continuous chart of the Euro Currency contractFig 4

Around contract expiration traders that normally use un-adjusted continuous charts for some reason want to switch to contract specific charts. There are a host of problems this could cause.

• The longer term trend can be in two different directions depending on the chart you select

• If the market is at life of contract highs or lows you will have no supply/demand levels to your left

• Using contract specific charts soon after a rollover and looking left will give you different supply/demand levels than the un-adjusted continuous chart on the same dates

All of these lead to inconsistent analysis of the market you are trading in. Most traders do not trade markets that are in the process of rolling over from one contract to the next. They will usually skip about 2 days and come back to this market later when everybody is looking at the same charts. There are so many cross currents in the price action around contract rollovers that most traders are better off to sit on the sidelines or trade another market that is not rolling over.

“Don’t go through life, grow through life” Eric Butterworth

– Don Dawson

DISCLAIMER 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.

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