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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?

  #1 (permalink)
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Back-adjusted, Continuous contracts - best for support and resistance?

Which is best for support and resistance trading?

Back-adjusted contracts (like IQFeed's @ES#C) or not (like @ES#)?

I'm curious what people think. I've preferred regular continuous contracts (not back adjusted), but @josh recently questioned that decision, so I am open to feedback.

Regular non back-adjusted chart @ES#:
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You can see the profile levels are different, and this would also affect all other pricing studies for support and resistance (OHLC based).

Mike

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  #2 (permalink)
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  #3 (permalink)
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Personally, I think it's a question of what more people are looking at. There is no "right" or "wrong" way to construct a contract, and some people prefer the gaps, while other people prefer to back-adjust. I would generally think that the majority of traders would either use the data-supplied back-adjusted continuous contract, or splice the contracts together (as ninjatrader does by default). A relative minority, I would guess, would leave the gaps in place. But I have no data to support this, just anecdotal-based evidence from what I see most people use when they post their charts.

The only "real" measure of price swings comes from the underlying "spot" or "cash" instrument, in this case, the cash S&P index, or as an alternative SPY. Anything that rolls as a futures contract does will be subject to interpretation.

I hope @Fat Tails will chime in as I know he is very knowledgeable on the subject.

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I'm thinkin most people use whatever comes easiest to their setup and they don't even know what that is. I'm using the actual prices from the previous contract. In my mind that's where the volume was and so that's what makes sense. If that's wrong, then lemme know and I will say baaaaa.

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  #5 (permalink)
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Let me just summarize a few points on continuous and backadjusted contracts.


Backadjusted Contract

The backadjusted contract correctly shows the relative price movement, but the absolute values shown are only correct for the last contract shown on the chart. The backadjusted contract is the only legitimate contract that can be used for backtesting without distorting the results.

A huge inconvenient of backadjusted contracts is that the values shown for the past can considerably deviate from historical prices. This is particularly true for contracts that are monthly rolled. An extreme example is CL. If you look at the weekly merge-backadjusted chart, you will find that the historical prices for crude in 2008 touched $ 185.88 per barril. However, the real high was at $ 141.89. This means that absolute pricse are distorted by 44 $/bbl for the month of the high. The reason here is the so called Cushing Contango, which is linked to the special situation in that depot, which is located in the middle of nowhere. But the chart, although absolute price are ridiculous, correctly shows the losses a long only fund that rolled on the selected rollover date would have suffered.


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Merge-backadjusted contracts offered by different data providers may be a little different in so far that different rollover dates were selected. In general this does not apply to financial futures, which either have known roll dates or for which differences are minor in general, even if different roll dates are applied.


Continuous contracts (Perpetuals)

The continous contract is a strange animal. It is created as the weighted average of two consecutive single month contracts with an ever changing weight. The advantage of continuous contracts is that the price level of the underlying is correctly displayed over a longer time frame.

The inconvenients of continuous contracts are

- that the price does not represent anything, the price does not even move in ticks (unless it is rounded which introduces an additional error source)
- that price movements are not correctly shown, swings are distorted, as the rollover gaps are continously injected into prices to make them disappear at the rollover date
- that there is no defined method how to build a perpetual contract, and contracts from different data providers can be quite different

IN general, the properties of a perpetual contract make them a valuable tool for long term traders and investors, but they are not suited for short term traders and daytraders.


Support and Resistance

All concepts of support and resistance are more or less based on self-fulfilling prophecy. Support and resistance are identified by traders using a set of pseudo-scientific tools called Technical Analysis.

If the traders all follow the same rules and fads, the concepts start working and we observe support and resistance.

Let us have a look at a few of those;

(1) trendlines
(2) daily, weekly and monthly pivots
(3) prior highs and lows
(4) fibonacci retracements and expansions
(5) round numbers


Which of them work better on backadjusted data and which work better on perpetual charts?

For some of them there is a clear answer, for others there is not. Pivots (2), prior highs and lows (3) and fibonacci retracements and expansions (4) probably work better on merge-backadjusted charts. Continuous contracts distort swing sizes, falsify highs and lows and cannot be used for pivots either. Merge-backadjusted charts correctly plot pivots, preserve swing sizes for calculating rectracements and do not distort prior highs and lows.

For trendlines (1) it is really a question of the time frame. If you draw a trendline on a long term backadjusted chart that comprises several years, then the trendline may be entirely false and even point in the wrong direction. The continous chart comes out the winner here. However, I would prefer to draw trendlines on cash chart, if available. On a short term chart, that is a chart over the last few days and weeks, the trendline is more accurate on a merge backadjusted chart.

For round numbers (5), the continuous chart is not much of a help, the merge-backadjusted chart produces correct numbers for the current contract month, but false numbers for the prior contract months, so it does not helpa lot. The best choice for round numbers is the merged non-backadjusted chart, which leaves the gaps visible on rollover date. This is the only chart, which shows prices that have been actually traded.

In the end there is no method that does it all, but I would say that continous contracts are pretty useless for the short term trader. So I rather agree with @josh. But I am also open to different views on the subject, as I know that there is no solution, which does not have a catch.

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@Fat Tails -- Some very interesting observations! You are a weath of knowledge!!!


Fat Tails View Post
The backadjusted contract correctly shows the relative price movement, but the absolute values shown are only correct for the last contract shown on the chart. The backadjusted contract is the only legitimate contract that can be used for backtesting without distorting the results.

I'm definately finding this to be true!


Quoting 
A huge inconvenient of backadjusted contracts is that the values shown for the past can considerably deviate from historical prices. This is particularly true for contracts that are monthly rolled. An extreme example is CL.

But then there is this...


Quoting 
The continous contract is a strange animal.
- that the price does not represent anything, the price does not even move in ticks (unless it is rounded which introduces an additional error source)
- that price movements are not correctly shown, swings are distorted, as the rollover gaps are continously injected into prices to make them disappear at the rollover date
- that there is no defined method how to build a perpetual contract, and contracts from different data providers can be quite different

IN general, the properties of a perpetual contract make them a valuable tool for long term traders and investors, but they are not suited for short term traders and daytraders.

Yep Yep.. personally not interested...


Quoting 
The best choice for round numbers is the merged non-backadjusted chart, which leaves the gaps visible on rollover date. This is the only chart, which shows prices that have been actually traded.

Which is what got me to recently switch... BUT..


Quoting 
In the end there is no method that does it all, and there is no solution which does not have a catch.

I've come to the same conclution.. switch'n to non-backadjusted has it quarks too.. But I've only given it a couple months now, so I'll stay this way for a bit and continue to observe/test... I'm definetly no expert, nor knowlegable enough on this subject to give advise.. but for me personally, and my limited experience, I could probably flip a coin and just deal with it either way... (I do like seeing where price has actually traded though)





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  #7 (permalink)
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@josh, would you post your ES profile chart going back to beginning of year so I can compare levels?

You are using IQFeed, yes? Are you using @ES#C or letting the platform merge?

Mike

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  #8 (permalink)
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Hi Mike,

If you are using DTN IQFeed, to get the continuous, back-adjusted data for roll-over, you would have to use @ES#C. IRT/MarketDelta assume automatically that you are using the continuous, so you don't need to enter more than just @ES#.

I had worked closely with DTN to have them adapt their feed because it didn't exist on most datafeeds and I was having to do it manually once I dropped CQG and Tradestation.

What is the difference?

For trading purposes, I have to have adjusted data for my composites and to look back and time to figure out where the product traded relative to the current contract. This gives me an idea of where things happened in the past given the "cost of carry" or premium that is part of computing the futures price.

Non-adjusted data is always provided for backtesting purposes. For example, for our automated trading systems, we test on unadjusted tick-level bid/ask data by Reuters and can't use adjusted continuous contracts. We need to know where it really traded when it traded and down to the bid/ask level to know if we could have or would have gotten a fill.

I hope that answers your question.

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Fat Tails View Post
The continous contract is a strange animal. It is created as the weighted average of two consecutive single month contracts with an ever changing weight. The advantage of continuous contracts is that the price level of the underlying is correctly displayed over a longer time frame.

...

IN general, the properties of a perpetual contract make them a valuable tool for long term traders and investors, but they are not suited for short term traders and daytraders.

Maybe there are multiple definitions of a continuous contract... My IQFeed continuous contract seems to be simply prior months spliced together. For example, there was only 1 tick difference going back 8 months through two rollovers on ES.

I can request a back-adjusted continuous contract, or a non-backadjusted, and on the back-adjusted I do get the 180s oil prices you show, but not on the other.

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Big Mike View Post
@josh, would you post your ES profile chart going back to beginning of year so I can compare levels?

You are using IQFeed, yes? Are you using @ES#C or letting the platform merge?

Mike

Here you go buddy, yes this is IQFeed.

I am using the #C which, as FT71 mentioned, IRT defaults to. IRT does not have the ability to merge contracts, but a comparison of NT's merging with IQFeed's #C shows that they are tick-for-tick identical except for one or two ticks shifted going back to late last year, and that may even be because I may have accidentally changed a rollover date for NT's merging function.

Note that I am using 2 price levels per histogram bar (so each bar in the histogram represents 0.50, not 0.25), to make the levels clearer as there are so many and it would otherwise blur.

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