By Don Dawson, Online Trading Academy Commodity Futures Instructor
So here we are between the Christmas holiday and the New Year. Did anybody get the "Holy Grail Trading System" for Christmas? If not, I think I saw one on eBay for $24.99. Of course they were sold-out but there was a note saying they were expecting a "new shipment" at any time. For those that want to wait for the new shipment, be my guest. Otherwise, let's do what will make us money on a consistent basis, "Learn about the markets we trade!"
So, Futures Expire and Stocks Don't. How Would You Chart That?
One of the big differences between Stocks and Futures is that the Futures contract has expiration dates. For a stock, you can look up the company stock chart all the way back to the day they went public. There are no expirations to deal with. Futures, on the other hand, will expire. If you were trading the current February Gold contract, you could just enter GCG9 on your charting package and see a daily chart that looks like this:
February Gold Remember that most Commodities have several contract months trading at the same time. For example, as of this writing Gold is trading in other months such as February, April, June and August. However, there is only one contract period that is the "Front Month". At this time, the Front Month is February. This contract will have the most liquidity (Volume and Open Interest) for the active trader. The other months trading are considered "Back Months". There is activity in these Back Months but the spread between the Bid and Ask can become very large simply because there is not as much liquidity. Most of the activity in these Back Months are conducted by the Commercials hedging their price risk. If there is ever a doubt about which contract is the Front Month, just go to the exchange website that the Commodity is traded on and look at the daily price summary. This will contain the Volume and Open Interest for each contract traded. Just look for the largest number under these two columns and there you have the current Front Month.
The above chart is February Gold, the current Front Month. This contract has been trading since about April of 2007 and will expire in February of 2009 (hence February contract). During the time this contract has been trading, there have been numerous Front Month contracts. If you look to the right of the chart you notice how the price bars look normal (full length, good bodies, not many gaps, fluid). Almost sounds like a good wine, huh? Now look to the left of the chart and you will see a market that is trading at that time as a Back Month commodity. Notice how small the bars are - there are gaps and dashes instead of full bars. It is very difficult to read price bars that look like Swiss cheese. Some of the problems using a chart like this are:
- Support/Resistance levels are difficult to define
- Studies such as Stochastics that use range for calculating will be distorted
- Pivot levels that are created will be done on very low volume
- Trend Lines are difficult to construct
- Prior to April 2007, we have no price bars, making longer-term analysis impossible
The Futures industry has adopted what is known as "Continuation Charts". What these charts do is to plot only the Front Month (most liquid) contracts. Each charting package will have its own symbol for Continuation Charts. Some examples are for eSignal, you use GC #F. For TradeStation, you use GC.P. By using these symbols your charting package will rollover to the new Front Month contract automatically for you. Let's look at a current Continuation Chart of Gold:
Continuation Chart of Gold This chart is the same time period as the February Gold chart (first chart), except that this one is a Continuation Chart. Notice how the chart looks much more fluid and readable from left to right compared to the first chart. Our indicators and trend lines will be much more useful to our analysis now. The data can go back as far as 20 years in some cases depending on your data provider. This is very helpful when we do our top-down approach to study weekly and monthly time-frame charts. We always want to know what is happening in our larger time-frames. Support/Resistance levels created many years ago will be of great value to us. These levels were created by the Front Month commodity, meaning there was good volume at these points to help substantiate good future Support/Resistance upon the next time price revisits these levels.
Even though Futures have expiration dates we can now see they are able to be charted much like a Stock would be. When looking for charting software, check to see that the package is capable of constructing these Continuation Charts. Students often ask how far back they should look for Support/Resistance levels. The answer is, "as far back as possible." The markets have very long-term memories.
"If you find a path with no obstacles, it probably does not lead anywhere."
Don Dawson
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