A Complete Guide to the Futures Market, 2nd Edition

CHAPTER 18

Selecting the Best Futures Price Series for System Testing

Garbage in, garbage out.

—Anonymous

System traders wishing to test their ideas on futures prices have always faced a major obstacle: the transitory life span of futures contracts. In contrast to the equities market, where a given stock is represented by a single price series spanning the entire test period, in futures each market is represented by a string of expiring contracts. Proposed solutions to this problem have been the subject of many articles and a great deal of discussion. In the process, substantial confusion has been generated, as evidenced by the use of identical terms to describe different types of price series. Even worse, so much misinformation has been provided on this subject that many market participants now believe the equivalent of “the earth is flat” theory.

There are four basic types of price series that can be used. The definition, advantages, and disadvantages of each are discussed in turn.

■ Actual Contract Series

At a surface glance, the best route might seem to be simply to use the actual contract series. However, there are two major problems with this approach. First, if you are testing a system over a meaningful length of time, each market simulation will require a large number of individual price series. For example, a 15-year test run for a typical market would require using approximately 60 to 90 individual contract price series. Moreover, using the individual contract series ...