Another variation of charting the Commodity Futures markets is using a continuous or nearest Futures contract type of chart. To many they might seem to be the same type of chart, but we will examine these two charts and see the differences.
When trading Futures we have to be able to plot the data on charts just like we do in the Stock or Forex markets. This allows us to make informed decisions of where to place our buy and sell orders. However, unlike the Stock and Forex markets, the Futures markets have to deal with contracts that expire. This means a different type of chart must be used to include the expiration of these markets.
In earlier articles I had mentioned contract specific charts. These charts simply plot the life of the contract. Data is collected on these charts from the First Trading Day of the contract all the way up to the Last Trading Day. These charts do a good job of giving accurate price levels because there are no adjustments made to the chart nor are there any expirations to deal with. Unfortunately these charts can have some limitations also.
When viewing these contract specific charts you first notice that there is a contract high and low. If the supply/demand balance of this market gets out of balance enough it will force prices through these highs/lows. Once this occurs we have no reference points for creating potential trading opportunities because this particular contract has never traded at these levels before.
Another problem you may encounter is the lack of liquidity before the market becomes a front month contract (highest volume and Open Interest). Before the market has good liquidity your chart may not have adequate candles to create market decisions.
To overcome this issue chartists have come up with Futures charts that are spliced onto one another as each contract expires and the next contract month begins to have the majority of volume in it. There are two styles of these charts:
Continuous Charting
Nearby Charting
The charts most Futures traders are familiar with are the… Continue Reading
