Which type of future contracts one have to use for Analysis/Trading. Should one have to use continuous contracts or non continuous contracts? One of the most repeated question faced from the beginner level to intermediate level traders.
Nifty Futures – Continuous contracts Vs Non continuous contracts
First let try to understand what is actually continuous and non-continuous contracts.
Continuous Contracts: Continuous contracts are stitched contracts to build a long term future charts. In a continuous contracts several contracts are stitched together post expiry to form a long term charts.
For Example : see the above Nifty Future charts where a February contract ended on 28th Feb 2019 and the next trading day March contract data is appended to the old Feb contract.
Whats the use of Continuous Contracts?
1)Long Term Structure can be studied. If you want to analyze the charts on Daily, Weekly or even hourly, 4 hourly timeframe then continuous contracts play a major role
2)For Backtesting data for an elongated period in one shot continuous contracts improves the productivity of the trader.
3)Continuous contract symbol remains the same for infinite period. So less data management and no need of changing the symbol every month post expiry.
Different Ways of Building Continuous contract
Continuation Charting : This method simply stitches older contract to the newer contract post the expiry of the older contract without any data adjustment. Rollover gaps will be seen in the charts if the newer contract has bigger premium.
Nifty Futures Daily Charts – Continuation Charting Method
Most of the Indian data vendors use continuation methods for NSE Futures without doing any rollover
It is the most preferred contract by most of the traders who want to analyze long term charts or study the trading system behavior. But if one using the continuation charting for backtesting purpose then rollover costing needs to added in case of positional trading strategies and in case of intraday trading strategies it doesnt affect much.
Rollover gaps affects the indicator post expiry for a shorter period and depends upon the indicator lookback period. Especially if one is very much concerned about such information one should consider using non-continous contracts or rollover adjusted contracts.
Rollover Adjusted Charting: This method eliminates the rollover gap by back-adjusting the old contract data. The price of the previous expiry data points being dropped is adjusted upwards or downwards to the price level of the contract being picked up in the series on the day of the roll. This is the approach preferred by Jack Schwager and others.
Non Continuous Contract / Individual Contract
Non-continuous contracts are simply individual contracts. This contract holds the data since the inception of the contract until the expiry of the contract.
Nifty March Futures Contract
For Example : The lifetime of a any Nifty Future contract is 3 months. Lets consider Nifty futures march 2019 contracts. During the month of Jan or Feb or Mar the March 2019 contract remains the same.
During the initial phase of the start life of the contract liquidity is very low and one the contract is very close to near month expiry liquidity starts flowing in as most of the time.
Traders prefer to trade in current month contracts and if the expiry is getting near trader might consider shifting/rollover to near month expiry and so the liquidity flow starts picking up in near-month contracts during expiry is nearing. i.e march 2019 future contract will start seeing volume flow or more participation only during the nearing of Feb 2019 expiry.
What is the use of Non-Continuous Contracts?
Non continuous contracts are quite useful for shorter timeframe traders who rather non concerned about long term structure of the chart but fearing their indicators might skewed during the start of the new expiry.
Especially if you are a algo trader or market profile / orderflow trader or a trader operating at lower timeframe non continuous contracts are the most prefferred one for real-life trading.
But once the contract expires the trader have to manually move to newer symbols in their trading software. A little bit of pain is there during the expiry. But if one is really considering to eliminate such rollover gaps then mostly
What contracts to use for Market Profile Studies?
If you are a market profile user then some of the nuances one might miss during the start of the expiry in index futures if one is using continuous contract. However, those issues will not be there in
But when comes to stocks futures / index futures contract if one want to measure references from previous expiry then continuous contracts are preferred as stock futures gets mostly liquid only during the start of the newer expiry and so back data of non-continous contracts are not so liquid until the contract gets near month expiry. So taking references from ill-liquid zones are not a preferred one. In such a case one can always prefer using continuous contracts.
There is no right or wrong methods of using continuous / non-continuous contracts. However if the trader is concerned about productivity while backtesting then non-continuous contracts are preferred. Non continuous contracts are preferred for analyzing long term structure. However for real-life trading (Algo trading, Shorter timeframe trading, Market Profile, Orderflow analysis) non continuous future contracts are most preferred.
Most of the data vendors support both continuous and non continuous contracts and most of the brokers support only non-continuous contracts in their charting/trading terminals.
Handling non-continuous contracts bit of manual work is involved with many trading analysis software. But yes if you don’t have non continuous contracts or don’t want to take that manual pain of changing new contracts in your real-life trading then always one can prefer the next best available resource continuous contracts.
I personally use a mix of continuous contracts and non-continuous contracts. Continuous contracts to perform Top Down Analysis (Quarterly, Monthly, Weekly, Daily, 4-hourly, hourly timeframe) and non-continuous contracts for real-life trading and market profile, volume profile and orderflow analysis.