A Complete Guide to the Futures Market, 2nd Edition

CHAPTER 5

Linking Contracts for Long-Term Chart Analysis: Nearest versus Continuous Futures

■ The Necessity of Linked-Contract Charts

Many of the chart analysis patterns and techniques detailed in Chapters 6 through 9 require long-term charts—often charts of multiyear duration. This is particularly true for the identification of top and bottom formations, as well as the determination of support and resistance levels.

A major problem facing the chart analyst in the futures markets is that most futures contracts have relatively limited life spans and even shorter periods in which these contracts have significant trading activity. For many futures contracts (e.g., currencies, stock indexes) trading activity is almost totally concentrated in the nearest one or two contract months. For example, in Figure 5.1, there were only about two months of liquid data available for the March 2016 Russell 2000 Index Mini futures contract when it became the most liquid contract in this market as the December 2015 contract expiration approached. This market is not particularly unusual in this respect. In many futures markets, almost all trading is concentrated in the nearest contract, which will have only a few months (or weeks) of liquid trading history when the prior contract approaches expiration.

Figure 5.1 March 2016 Russell 2000 Mini Futures

Chart created using TradeStation. ©TradeStation ...