Lessons from the Pros


You Can Keep Having Fun, But You Have to Leave Here

Has anybody heard this line before?  If you have you were probably out having a good time, perhaps celebrating a great trading day.  This line also applies to the Commodity Futures markets.  Futures markets are contracts being bought and sold that will all eventually expire.  For example, the S&P contract will next be expiring the 3rd Friday of September.  Before this contract expires the majority of the daily volume (number of contracts created by a buyer and seller each trading session) and open interest (number of outstanding contracts still not offset at the end of the regular trading session (RTH) and carried over into the extended trading hours (ETH)) will begin trading the next contract month December.  This is also referred to as a rollover.

With the new Pro Futures class now being taught at Online Trading Academy there is going to be much more focus on other Futures markets than just the E-Mini Stock Indexes.   Since each Commodity Futures contracts have unique contract specifications they also each have unique rollover dates before a contract expires.

We will focus on the Trade Station charting platform, but these rules will apply to any chart package you are using.

When it comes to charting Commodity Futures prices we have a host of ways of doing so.  This is usually up to the individual trader to choose which one works for them.  The key is consistency in using the same one all the time.  If you keep switching between the different charting styles you may get paralysis of analysis trying to make a trading decision.

Since each Commodity Futures contract has an expiration we could simply plot just the contract month that is trading and use that for our supply/demand levels.  For example you would enter the symbol for Corn to be CZ12.  That would plot the December 2012 Corn contract, there are some disadvantageous to this.  Eventually the contract will expire and you will not have any more price action for that contract nor will the Exchanges accept orders for expired contracts for obvious reasons.  There are times when a contract specific chart works very well, but that is for another article.  In the meantime we need a chart that will plot data that appears to have no contract expirations.

These charts are called continuous charts.  A continuous chart is designed to splice on the next month in the contract cycle once the volume leaves the front month contract.  This allows you to see the price action of contracts that have good liquidity and full bodied Candle patterns.  Unlike a chart that is illiquid causing you to see dots and dashes making it very difficult to find good levels.

The continuation charting style I would like to discuss is the unadjusted type.  To get this type of chart a trader using Trade Station must enter some numbers and letters after the symbol of the Commodity Futures contract.

Examples are:

  • @ES=107XN
  • @JY=103XN
  • @CT=110XN

TradeStation will use the @ symbol to mean a continuous charting method of that symbol.  Then comes the varying numbers you see above.  What do they mean and how do we determine what numbers to use on each individual Commodity Futures symbol?

These numbers tell the charting package exactly how many days to rollover the Commodity Futures contract near each expiration of the contract.  This allows for only prices to be plotted that contain the high volume of the new contract and discontinue plotting the contract that volume is going to be dropping off into its expiration.  But when should your charts rollover?

If you are trading a Commodity Futures contract that is physically delivered they will all have something called a First Notice Day (FND).  This is the day that any trader wishing to make or take delivery of the particular Commodity contract must notify the Exchange of their intent.  As a speculator you do not want  to be trading after this day in that contract.  Your Broker will most likely not allow you to trade beyond this date either due to the risk of delivery assignment.  Being long a contract after this date is telling the Exchange you want to take delivery of that Commodity and a delivery will most likely be assigned to you.  This information is important to the trader charting a Commodity Futures contract.  Because everybody but people interested in the delivery process will have left this contract by the FND that tells you the rollover date for that Commodity.  That is half of the equation, the FND.  (I will show you where to get that soon).

The next date you will need is the Last Trading Day (LTD).  This is the date the contract actually expires and will not trade anymore for that month and year.  Now you should be able to see what two dates we will need to determine chart settings for an unadjusted chart. We will take the LTD – FND to determine how many days the contract should rollover before expiration.  When we count these days we “only” count trading days, no weekends or holidays.

You are probably wondering where you get the information of a Commodity Futures contracts FND or LTD?  There are many calendars on the internet and the Exchanges will list them on their calendars too.  One drawback to using an Exchange calendar is that you only see listed the products that trade on that Exchange.  Here is a link to a website that lists all of the notice days you will need: http://www.insidefutures.com/calendar/index.php

Looking at this calendar let’s find the Ten Year Treasury (TY) contracts FND and LTD.  If you look at August 31 you will see that the Treasury complex has FND for the September contract that day.  This means that the majority of volume will be gone from the September contract on the first trading day of September.  The Front Month will then become December 2012.  The next thing you need to find is when does the September TY expire?  We scroll forward to September on the calendar and we find that on September 19 the September TY will expire.  Now we simply count from September 19 back to August 31 (only trading days).  We see there are 13 trading days between these two dates (ignore Labor Day holiday and weekends).  Another note about contract rollovers.  In this example of the TY we see 13 trading days.  During the previous contract rollover there were 15 days.  This is very typical of the Futures markets.  Sometimes there are holidays, positions need an extra or one day less to rollover etc.  What we will do is just take an average for these rollovers and the most you will be off is a day, maybe two days.  The average cycle for the CME Interest Rate products is 14 days.

With this information we can create a continuous contract that will rollover 14 days before every contract expiration.  On your Trade Station chart or Radar Screen you can enter the symbol @TY=114XN.   Unlike the @ES=107XN which rolls over 7 days before the contract expires the TY goes a few more days.

As I mentioned earlier each Commodity Futures contract will rollover at different times before each expiration.  It is a good idea to go through the markets you will be trading and create a list of these expiration dates so you can create charts that more closely represent contract months with the most volume.

There are some Commodity Futures contracts that the FND comes after the LTD.  The Energy markets come to mind for doing this.  This is done to allow the person/firm dealing with the delivery process to know the contract expiration settled price.  There will be a fixed price for all involved to deal with.  Unlike a contract that has FND before the LTD where those participants will not know exactly what they will pay or get paid until the LTD contract settled price.  This throws a wrench in the spoke for the above formula.  For these markets a trader needs to look back a few contract expirations.  Find the LTD of the market you are tracking.  Then open an intraday chart of any timeframe and observe the volume for each trading day coming into the LTD.  You will notice that each Commodity Futures contract will show the volume drop off one contract and the next day the next month out will have all the volume.  By looking at a few of the previous expirations you will see a pattern of the number of days this occurs before the LTD.  Again, plan on there being a 1 or 2 day variance.

Here are a few of the numbers for other contracts so you can practice and see if you can match these numbers (remember, there will be a 1 or 2 day variance):

  • Live Cattle @LC=120XN
  • Currencies  @EC=103XN
  • Cotton  @CT=110XN
  • Sugar  @SB=110XN

Once you determine these days before expiration I would advise writing them down somewhere in your trading plan for each of the markets you are going to trade.  Continuation charts are needed when you do longer term analysis on your charts.

“Never let success go to your head and never let failure go to your heart.” – Author Unknown, perhaps they learned this lesson in life the hard way.

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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