Continuous Back-Adjusted Contract

Reblogged from the Insights Blog

Example article from the The Private Banker research section:

The higher time frame analysis becomes tricky especially when you are looking at a market that rolls its contracts every month. The answer to this depends on what you’re looking to see. Are you just looking for psychological levels? Or are you looking for levels that will reflect physical inventory?

Psychological levels will be best seen using the front month continuous contract that does not back adjust. If you want to see where potential inventory is sitting, you will want to use the front month continuous back-adjusted contract.

One of the tricky things with certain futures markets is there is volume printing in multiple contract months. Here is an example of what we're referring to.

This is the volume currently being traded within the various contract months, they are most likely calendar spread trades and longer term hedges. You will notice that when the front month contract comes close to expiry the volume migrates over to the new contract as traders roll their positions.

As you can see these are two different data sets. What is important is what the bigger picture is showing while still reflecting potential inventory reaction at each level. The back-adjusted will show prices that the market did not trade at when looking further back but that is because the data (our tools) adjust to the new contract price. If the data did not back-adjust there would be gaps in price and our tools would not make sense making it difficult to view the context of the market.

Front Month Continuous

Front Month Continuous Back-Adjusted

So, in summary, we prefer to use the back-adjusted contract for reasons that we’ve just explained but its good to keep an eye on the continuous only for the psychological aspect of everything. The smaller the time frame you use, the more important the back-adjusted contract becomes.

What we mean here is if you were comparing the Monthly Bar data to say a large volume based bar while plotting the Monthly VWAP. The previous months levels will reflect inventory with the roll. On an intra-day basis, you can just look at the current month contract but the back-adjusted will provide you with the correct levels if you’re referencing something that is beyond the current contract month or a level that was established say, 2 – 3 months ago for example.

Back-Adjusted continuous Futures Contract Data

Shows inventory in the market, this data type splices past contracts and put them together without price gaps. As the contracts rolls over the macro to micro levels change providing you with information that the continuous contract does not. For example if you are a long term hedge fund, you would be using this data to track the your running inventory in the markets over multiple contracts.

Continuous Futures Contract Data
Provides a more physiological perspective, as the contracts roll over the price levels gaps up or down to the new contract level leaving historical levels in place for the actual price they traded at in the present contracts. You cannot see the current inventory in the markets but you can see correct historical levels.

To change between the various options in Sierra Chart go to Chart -> Chart Settings. Click the Advanced Settings tab: