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Cash Prices
These are the price for a commodity for immediate delivery. For example, its October 30 and you are looking at gold prices. You see a price for the cash market and another price for the December futures contract. The cash price is gold for immediate delivery. The December contract is gold for December delivery. The December contract price is higher which reflects the cost of carry or charges for interest, storage, and insurance costs etc.
Futures Contracts - Individual Contract Months
This is the price of a given future contract, such as, November Soybeans, April Crude Oil, or July Corn. The price is established in a trading pit on the floor of a commodities exchange by the open outcry system in which every trader, in the trading ring, acts as his own auctioneer. Each trader shouts to the rest of the trading pit his intentions either to buy or sell and how much and at what price. The prices of a futures contract differs than that of the cash market because a futures contract is for future delivery, not immediate possession.
Future Contracts - Artificial Continuation Series
A. Continuous
This is a price series of different commodity contracts that have been spliced together. Since every commodity futures contact eventually expires this is necessary to create long-term price history for the purpose of charting. For example, to construct a continuation price series of gold futures you could take the February, April, June, August, and December contracts and chart the prices beginning with February. When April becomes the more heavily traded contract you would then switch or rollover from February to the April gold futures contract. The method for calculating when the rollover should take place varies depending upon the individual ‘s preferences but usually is calculated by some method of the contact’s volume and/or open interest or based on the date. The continuation series is constructed for the purpose of creating a long-term price history of a given futures market for the purpose of technical analysis.
B. Back Adjusted Continuous
The back adjusted series is constructed using exact same technique as a continuation series with one exception. At the time of rollover the entire price history of all pervious trading days in the series is shifted up or down by the amount of the rollover differential. For example, lets say the price series your constructing for the crude oil market and you are going to roll over from the August to September contract. On the day of your rollover the trading ranges for crude oil futures are:
August (Open $28.00, High $28.50 Low $27.50 Close $28.25)
September (Open $28.50, High $29.00 Low $28.00 Close $28.75)
You proceed to add the open, high, low, and close of September’s prices to the series. Next, you would adjust all of the previous trading days opens, highs, lows, and closes by the rollover differential. This differential is calculated by the following (September’s Close – August’s close) which would give you a difference of 0.50 Cents. At the time of rollover you would start adding September’s price action and adjust all of the preceding data by 0.50 cents.
The back adjusted series is made for the purpose of creating a long-term price history of a give futures market for the purpose of testing trading strategies. The reason for the removal of the price difference is if you are testing a trading strategy you would not want an artificial gap in your series because your test results would be inaccurate. In a simulated testing environment the results would show having profited or witnessed a loss by the amount of the rollover gap when in reality this would never happened. For example, if you are rolling from October crude oil at $25.00/barrel to November crude oil at $25.25/barrel the 0.25 cents difference in neither profit or loss.
The back adjusted series solves this problem and enables you to test various strategies as they would have appeared in the real world. Furthermore, back adjusted data series can, in some markets, become very low. In markets such as coffee the prices can actually go below zero! However, the fact that the price levels are different from the actual contract at that point in time is irrelevant. What matters for the purpose of testing trading methods is the price relationship. Even though coffee never really traded –20.00 cents a pound, what is important for the purpose of simulated testing is that if you went long Coffee at –20.00 cents a pound and sold it at –15.00 cents a pound it’s the same as if you went long at 70.00 cents a pound and liquidated the position at 75.00 cents a pound.
C. Gann Contracts
This series is also the same as a continuation series with one exception. The series contains only a specific contact month. For example, you are tracking December Gold and at the rollover you would add next December’s contract instead of the next active month. You would keep adding December’s prices until the time of the next rollover. At that time you would then rollover from the current contract to December of next year. Gann contracts are useful for the purpose of analyzing seasonal patterns.
D. Spreads
Commodity spreads (or switches) measure the price difference between two different contracts, usually futures contracts. Spreads can also measure the difference between the cash market and a futures contract commonly referred to as basis.
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