44 lines
3.7 KiB
Plaintext
44 lines
3.7 KiB
Plaintext
280
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A Complete Guide to the Futures mArket
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series. For example, a 15year test run for a typical market would require using approximately 60 to
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90 individual contract price series. Moreover, using the individual contract series requires an algo
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rithm for determining what action to take at the rollover points. As an example of the type of problem
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that may be encountered, it is entirely possible for a given system to be long in the old contract and
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short in the new contract or vice versa. These problems are hardly insurmountable, but they make the
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use of individual contract series a somewhat unwieldy approach.
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The awkwardness involved in using a multitude of individual contracts is not, however, the main
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problem. The primary drawback in using individual contract series is that the period of meaningful
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liquidity in most contracts is very short—much shorter than the already limited contract life spans.
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T o see the scope of this problem, examine a cross section of futures price charts depicting the price
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action in the one
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year period prior to expiration. In many markets, contracts don’t achieve meaning
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ful liquidity until the final five or six months of trading, and sometimes even less. This problem was
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illustrated in Chapter 5. The limited time span of liquid trading in individual contracts means that any
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technical system or method that requires looking back at more than about six months of data—as
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would be true for a whole spectrum of longer
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term approaches—cannot be applied to individual
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contract series. Thus, with the exception of shortterm system traders, the use of individual contract
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series is not a viable alternative. It’s not merely a matter of the approach being difficult but, rather, its
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being impossible because the necessary data simply do not exist.
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■ Nearest Futures
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The problems in using individual contract series as just described has led to the construction of vari
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ous linked price series. The most common approach is almost universally known as nearest futures.
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This price series is constructed by taking each individual contract series until its expiration and then
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continuing with the next contract until its expiration, and so on. This approach may be useful for
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constructing long
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term price charts for purposes of chart analysis, but it is worthless for providing a
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series that can be used in the computer testing of trading systems.
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The problem in using a nearest futures series is that there are price gaps between expiring and new
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contracts—and quite frequently these gaps can be very substantial. For example, assume the July corn
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contract expires at $4 and that the next nearest contract (September) closes at $3.50 on the same day.
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Assume that on the next day September corn moves from $3.50 to $3.62. A nearest futures price series
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will show the following closing levels on these two successive days: $4, $3.62. In other words, the near
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est futures contract would imply a 38
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cent loss on a day on which longs would have enjoyed (or shorts
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would have suffered) a price gain of 12 cents. This example is by no means artificial. In fact, it would
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be easy to find a plethora of similarly extreme situations in actual price histories. Moreover, even if the
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typical distortion at rollover is considerably less extreme, the point is that there is virtually always some
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distortion, and the cumulative effect of these errors would destroy the validity of any computer test.
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Fortunately, few traders are naive enough to use the nearest futures type of price series for computer
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testing. The two alternative linked price series described in the next sections have become the approaches
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employed by most traders wishing to use a single price series for each market in computer testing. |