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Back-adjusted, Continuous contracts - best for support and resistance?
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Back-adjusted, Continuous contracts - best for support and resistance?

  #21 (permalink)
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DarkPoolTrading View Post
Thanks to those who contributed to this thread. A few things have been cleared up for me.

Just one question though, say im using back adjusted charts and manually backtesting a discretionary S/R based methodology. I go through +-1 year worth of charts manually marking levels, zones, profile levels, and the resulting trades. Will the results I get from that manual exercise be an accurate representation of what really would have happened at the time?

For example say i've got a composite volume profile over a 20 day period. That 20 day period however happens to span over 2 contracts. Will the levels that im manually marking in hindsight a year later be an accurate representation of what would really have happened? ie: those trades that im marking, would they have been taken as seen in hindsight a year later on the back adjusted charts?

Many thanks.


@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.

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  #22 (permalink)
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Fat Tails View Post
@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.

Thanks @Fat Tails

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.

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  #23 (permalink)
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To adjust or not to adjust?


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.

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  #24 (permalink)
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Leon of Pizza View Post
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.

There is no perfect solution to this problem.

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