Which Contract to Use for Longer Term MP when Front-month Contract Expires?

[AgeKay 10]

Let's say the front month contract has just expired and you want to create a MP of the last 3 months, on which contract would you base your MP chart on? Do you use the data of previous front-month contract until the expiry date of that contract and then the new front-month contract data or do you only use the data of the new front-month contract, which has obviously been trading for longer than 3 months?

In both cases, could you please state your reasoning. I don't want to argue, I just want to know which makes more sense.

[MightyMouse 12]

Age,

 

I don't do either for a longer term MP. Most data providers I would think have a continuous contract that you can use for charts and backtesting. I Use IQ feed and typically the continuous contracts look something like this: @es# for es, or @eu# for the euro.

 

Tradestation uses @es or @EC. That's the easier way to chart a longer term MP.

 

The data with these symbols is always the front month. I can't remember a time where I wished that I could use the specific contract month symbol.

 

I hope this helps out.

[Kiwi 16]

A continuous contract is created by back adjusting the data. It takes a long time to explain it given the variations so you might what to google it for this site first and others if you cant find it.

 

 

Edit: Actually heres a link http://www.traders2traders.com/linkindex/Goto.asp?ResourceID=110

[alleyb 10]

The age old question makes me smile. There will always be a multitude oif opinions all slightly different.

The Gann boys would argue that you compare March vs March, June vs June, September vs September, December vs December

There will be others who say adjust the chart by stating that the new level is the equivalent of the old level and therefore if one still used paper hand drawn charts you would effectively cut the chart in two and then re splice it so that the new contract would line up the new price vs the old price. IE it became a matter of changing the scale. Then there is the school who says just leave the gap and treat it as a gap.

I fall into this latter catorgary for it has become apparent that over the years within 4 days in over 90% of the times the gap is closed. There is a perfectly logical explanation for this occurence but to specifically answer your question then you will find that back months despite not having the same volume as front months has the same pattern and so you would create your long term profile with your "new" contract understanding that what I have said above applies in that the old levels will still be applicable to the new levels almost without exception. You see numbers repeat themselves constantly but most traders have such short term memories that they forget the footprint left by the history of the chart

[Guest forsearch]

I concur, Alex.

 

Otherwise with the ratio-adjusted method you have charts that show prices that were never traded at all, and are specious, to say the least.

Edited August 31, 2008 by forsearch

[AgeKay 10]

alleyb, so what are you saying? It does not really matter? Or should you use only the front-month contract despite lack of volume when it was a back-month contract since you would see the same volume distribution?

[alleyb 10]

AgeKay you potentially open up a discussion that is at the very heart of the day traders lack of knowledge about historic prices. DIFFERENT VENDORS HAVE DIFFERENT AMOUNTS OF HISTORY - a classic occurence would be in the Grains where the most amount of data I have found goes back to 1968 and yet the CBOT has been trading Corn since 1851 (and I do have somewhere a chart of Corn back to 1878) - and this therefore means that you don't know for example the beginning of time because all technical analysis has to start somewhere so if you compare 2 vendors with different history then you will find that the oscillator you entered will then give 2 different values and I have frequently thought that it must therefore be possible to force some algo trader to kick in their model once a certain level is passed because his chart does not give the full picture.

Now you might argue that data back that far is irrelevant and I might agree except to say do you know what was the all time high in Wheat and when and you may be surprised to find out that it might not have been this year at all.

To answer specifically the questions you pose. No it does not really matter what you use for the pattern will ultimately be the same, the levels will additionally be the same and as volume builds across what used to be the back month then you can start to shift focus more to the new front month as the data builds so long as you don't forget that numbers repeat themselves.

As an aside Pete Steidlmayer used to say that the long term time frame trader was more evident in the back months for no day trader would venture past the front month and although you may find there is a lack of data in back months there will by default be the occasional spread trade, basis trade and of course there are all the settlement prices which will all go into your being able to see the historic distribution

[AgeKay 10]

I am not going to look more than 1 year back and this topic is not about historical prices or price patterns, but market profile or volume distributions where the volume at a specific price level is important even if that means that you have to adjust for the gap.

[alleyb 10]

I sense a degree of frustration. Maybe you missed the point

To answer specifically the questions you pose. No it does not really matter what you use for the pattern will ultimately be the same, the levels will additionally be the same and as volume builds across what used to be the back month then you can start to shift focus more to the new front month as the data builds so long as you don't forget that numbers repeat themselves.

numbers clusters volume nodes whatever you want to refer to will repeat. It is not about adjusting for the gap but just perhaps in case you are a visual person then here are the current charts for the September S&P and the December and you can then draw your own conclusions. I apologise if S&P is not the contract that you ultimately had in mind bit the principal remains the same

[AgeKay 10]

Thanks for the charts, but I still don't get the point. To me, both market profile and the volume distributions of both contracts look very different. Yes, the general shape looks kinda similar but if you look closely you'll see that there are big differences at the individual prices.

[alleyb 10]

agekay. In an attampt to show you that the distribution is the same here I have re-stated the September contract to show the same composite but with a different timescale to get rid of the noise to show you that the September and December distributions are in fact the same. The differences at individual prices is accounted for the fact that the December trades at a small premium to the September but you still do not get it because you do not countenance the fact that the MP footprint is like an internal brain for the market and numbers repeat. The same numbers are applicable in September can be used in December and you will find that the volume pattern will replicate