Unravelling the Role of Volume in Futures charting
By:
Iftekhar (Ifty) Khan
On
19/11/2023Reading time:
2 min
Summary:
When it comes to charting Futures markets using a continuation chart, there's a plethora of approaches available. Ideally, if Futures contracts maintained consistent trading volume from the first trading day (FTD) to the last trading day (LTD), charting would be straightforward. Unfortunately, the reality is different, and traders must contend with the fluctuating volume of each Futures contract.
The term 'front month' refers to the nearest expiration date in futures trading. It is commonly used when describing futures or options contracts with earlier expiration dates. The 'back month' refers to contracts that expire later than the front month.
During the initial months of trading a Futures contract, there is minimal volume, resulting in an illiquid environment that distorts charts. These early charts display numerous dots and gaps, indicating the lack of substantial trading volume. Over time, as earlier contracts expire, their volume trickles down to subsequent contract months, enhancing liquidity.
Consequently, the charts evolve, transforming from scattered dots and gaps to more coherent, full-bodied candle patterns. As a contract becomes the near month with the highest volume, all traders and speculators should gravitate toward it. The only time a trader should stay on the old contract is if a position is on; otherwise, move to the higher liquidity, new contract month. The contract eventually approaches its expiration LTD, prompting market participants to initiate rollovers to the next contract in the cycle.
The challenge for charting arises during contract expirations and periods of low liquidity in back months, which can hinder detailed technical analysis for traders. To address this issue, Futures charts can be spliced together at each contract expiration, creating a seemingly continuous historical chart. The only limitation lies in the commencement date of the actual Futures market, with different markets tracing back to various historical periods.
Solving the Unadjusted Continuous Futures Chart Puzzle
The quest for a reliable unadjusted continuous Futures chart symbol has led to the exploration of alternatives, particularly on the TradeStation platform. While a symbol intended for unadjusted charts initially seemed promising, discrepancies emerged, prompting a search for a more accurate solution.
One such symbol recommended for an unadjusted continuous Futures contract is:
Example: Crude oil @CL=103XN
Whereby…..
@ = Continuous Chart
CL = Root Symbol of Commodity Future Market
1 = Roll to the next contract month in the cycle
03 = Day to roll data before contract expires
X = Until Expiration
N = Un-Adjusted style
While this symbol works well, it has a limitation: some Futures markets may not roll over the same number of days at each expiration, potentially causing disparities in shorter-term charts.
Charting Consistency Across Futures Markets:
For traders seeking consistency in unadjusted continuous charts across various Futures markets, the following table provides recommended numbers of days for rollovers before contract expiration:
Market Rollover X Days Before Expiration
-------- -----------------------------
Stock Indexes 07
Currencies 03
Interest Rates 14
Metals 20
Live Cattle 17
Lean Hogs 09
Feeder Cattle 10
Grains & Oil Seeds 10
Sugar 10
Coffee 20
Cocoa 20
Orange Juice 08
Lumber 17
Cotton 10
Crude Oil 03
Heating Oil 03
Gasoline 03
Natural Gas 03
Stoxx 50 01
These recommended rollover days aim to align charts consistently with what other traders are viewing across different chart packages.
While the Futures industry continues its search for a universal continuous chart symbol, traders are encouraged to find a chart style that suits them to avoid analysis paralysis amidst the variety of available charting options.