As many of you know, when it comes to charting a Futures market using a continuation chart there are many possible ways to do this. If a Futures contract always had the same amount of volume traded from the first trading day (FTD) to the last trading day (LTD), things would be much simpler. Unfortunately that is not the case and we do have to deal with this for every Futures contract traded.
When a Futures contract starts trading on its FTD there is very little volume for many months. This illiquid environment can cause distortions in our charts. If we look at charts during this time we will see many dots and gaps, a sure sign this market has no volume trading in it yet. As time goes by and the contracts before this one start to expire the volume from the expiring contracts trickle down to different contract months, thereby providing more liquidity. The charts start to take on a more liquid nature and we start seeing more full bodied candles instead of the dots and gaps. Eventually this particular contract will become the near month (contract with the most volume) and the majority of speculators for this Commodity will be trading in this particular month. As more time passes this Futures contract will come to its expiration or LTD. Shortly before this contract approaches it’s LTD market participants will begin trading the next Futures contract month in the cycle also known as a rollover. This is how the life of all Futures contracts evolve from their FTD to their LTD.
Due to these contract expirations and low liquidity in the back months a chart of just the specific contract month itself can create some problems for traders who are looking for detailed technical analysis. To help eliminate this problem Futures charts can be spliced together at each Futures contract expiration. The result is a chart that appears to be continuous when we look back in history. The only restrictions the trader faces is when the actual Futures market actually started trading. For example, a continuous chart of the E-mini S&P only goes back to 1997 because that is when it started trading. Other Futures markets can date back to much earlier times in history.
As a trader and instructor for Online Trading Academy I am always looking for ways to help simplify this sometimes ambiguous task of charting continuous Futures market contracts. While at the… Continue Reading
