Continuous Contracts - To Adjust or Not?

[jokerjoe 10]

I've been racking my brains trying to sort out back-adjusted data recently, none of the various data providers do it as I'd like them to. However I've been wondering if it's really necessary to back-adjust.

 

Yes - an adjusted series more accurately reflects a positions p&l. However I don't test mechanical systems, I'm more interested in support and resistance levels.

 

No - when a contract expires the price at that moment is good approximation for the spot price. In which case perhaps it makes more sense to just use the spot price. Two problems though. Firstly, the spot price may not be available (eg certain commodities). Secondly, volume is an integral part of my analysis.

 

I'd very much like to hear people's thoughts on the matter.

[gianno 10]

I faced the same problems and my solution was as follows: (a) for backtesting I use continuous reverse adjusted series (b) for technical analysis I use non-adjusted front contracts.

 

Maybe this website can help: PINNACLE DATA PRODUCTS - Continuously Linked Commodity Contracts - CLC Database

[joshdance 10]

I've been racking my brains trying to sort out back-adjusted data recently, none of the various data providers do it as I'd like them to. However I've been wondering if it's really necessary to back-adjust.

 

Yes - an adjusted series more accurately reflects a positions p&l. However I don't test mechanical systems, I'm more interested in support and resistance levels.

 

No - when a contract expires the price at that moment is good approximation for the spot price. In which case perhaps it makes more sense to just use the spot price. Two problems though. Firstly, the spot price may not be available (eg certain commodities). Secondly, volume is an integral part of my analysis.

 

I'd very much like to hear people's thoughts on the matter.

 

Merged back-adjusted contracts accurately reflect high-to-low swings, so are an accurate representation of how far price actually moved in relation to a high or low. However, any data except that in the front-month contract will not show the actual price traded.

 

Merged non-back-adjusted contracts accurately reflect the actual prices traded, but are useless for high-to-low swing movement, so S/R levels will not be accurate, fibs will not be accurate, and so on.

 

Continuous contracts also reflect actual prices traded, but again, the high-to-low swing ratios are off, the further back in time you go. Each data vendor will construct a continuous contract in a different way so they are not identical.

 

The question is, what are you trying to achieve? Based on the above, determine the answer and go with that. Stuff like S/R only works because enough traders use it that it works, so use whatever others who trade what you're trying to accomplish will be using.

 

Just curious--what software and data provider do you use?

[jokerjoe 10]

Hmmm... I'm mostly interested in where volume clusters, market profile/volume histogram concepts. I see what you're saying about the hi/low swings.

 

I use InvestorRT which doesn't have any c.c. management. Been using eSignal which doesn't have 3rd party adjusted data support, and also DTN which does but doesn't rollover certain commodities "properly" (using the front month when a further out contract is more liquid).

[joshdance 10]

Hmmm... I'm mostly interested in where volume clusters, market profile/volume histogram concepts. I see what you're saying about the hi/low swings.

 

I use InvestorRT which doesn't have any c.c. management. Been using eSignal which doesn't have 3rd party adjusted data support, and also DTN which does but doesn't rollover certain commodities "properly" (using the front month when a further out contract is more liquid).

 

What do you mean about DTN which doesn't roll over properly? DTN doesn't "roll over" single month contracts. It like other data vendors, constructs a continuous contract (the "#" one) which is independent of time.

 

DTN has a contract for each month (or say quarterly if you mean the index futures). It doesn't do rollover. Your software must do that, and IRT does have a rollover function (I know, I used to use it). It does this only to remove the gaps (this is the "adjusting"), and thus shows correct high-low swings. DTN is not responsible for this, they have no concept of a "rollover".

[jokerjoe 10]

I find IRT rollover adjustment a hassle for multiple contracts and then you have added worries of not accidentally overwriting adjusted data with current data.

 

When constructing a c.c. you need to select which contracts to use and when to switch contracts, so I would argue that is not independent of time. I would like to switch when volume further out exceeds that of the front month, ie use the most liquid contract at the time. DTN frequently use the front month which isn't necessarily the most liquid. This is particularly noticeable in soft commodities, in their c.c. series there are periods of months with hardly any volume. This is not an issue they are unaware of as it's been discussed in their forums.

 

This is somewhat digressing from my original question...

[joshdance 10]

I find IRT rollover adjustment a hassle for multiple contracts and then you have added worries of not accidentally overwriting adjusted data with current data.

 

When constructing a c.c. you need to select which contracts to use and when to switch contracts, so I would argue that is not independent of time. I would like to switch when volume further out exceeds that of the front month, ie use the most liquid contract at the time. DTN frequently use the front month which isn't necessarily the most liquid. This is particularly noticeable in soft commodities, in their c.c. series there are periods of months with hardly any volume. This is not an issue they are unaware of as it's been discussed in their forums.

 

This is somewhat digressing from my original question...

 

Perhaps there's a terminology difference we have here. DTN's "continuous contract" for ES is @ES# ... there's no month associated with it. It's this contract that will show inaccurate high to low swings over a longer period of time.

 

If you want to switch when volume shifts over, and so forth, then you need to manually roll over your own contracts. You do it either monthly or quarterly, and it should not take that long to do.