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Q: Backadjusted versus Perpetual - which one is the best ?
A: It depends on your trading system.
Alot of people on the list are saying that backadjusted is crap & perpetual
contracts are better or vice versa.
To the newbies out there, do not beleive anything that people are telling
you. The type of contract you should use is TOTALLY dependent on the
trading system you are using.
FOR EXAMPLE:
I personally trade short-term volatility breakout systems which reference
TRUERANGE all the time and I need to backtest results with market data that
accurately measure the daily truerange of the market.
IF I USE CONTINUOUS BACKADJUSTED DATA
My systems DO NOT care if the T-Bond is trading at 135.00 or 50.00 or even
10.00. My systems just need to measure the daily truerange. For my systems,
a continous backadjusted contract works just fine for me. Continuous
backadjusted contracts accurately keep the range and truerange of a market
the same but it does this by changing the outright price levels (i.e.
O,H,L,C) of the market. The only issue with this type of data is that the
longer the backadjusted datafile is, there is a chance that the historical
data will eventually backadjust into negative (-ve) numbers. It is at this
point that you must either:-
(a) not backtest beyond this point because negative numbers may have a
detrimental effect on the calculation of your trading system code or
(b) construct another backadjusted file to backtest that time period which
went negative (-ve). You would construct another datafile with different
start and end dates to ensure that the historical data does not contain
negative values.
IF I USE PERPETUAL CONTUNUOUS DATA
Perpetual data weights or "massages" the highs and lows during the trading
days when rollovers take place. This effect causes the following which are
different to real-time trading:
- ranges during this weighting or rollover period are usually different to
the front or the next futures contract. That is, perpetual data creates
ranges that are not "real-life" ranges.
- because the ranges are different to the real-time contracts, the daily
truerange during these rollover periods are different also. This produces
daily trueranges which are not "real-life" trueranges.
Because perpetual contracts cause the above effects, perpetual contracts
give me false signals on my trading systems during the rollover period.
This being the case perpetual contracts are completley useless to me and my
trading.
CONCLUSION
The best way to see what effect each type of continuous contract has on
your systems is to:
(a) run your trading system on (1) the backadjusted contract (2) the
perpetual contract and (3) on the real-time futures contract.
(b) create a set of system parameters to "force" the system to trade
through a futures rollover period. It does not matter whether the system
parameters makes or loses money. All you are trying to do here is generate
signals during this period so that you can check and verify that these
signals ACTUALLY OCCURRED on the real-time futures contracts.
(c) Depending on the nature of your trading system and the type of
continuous contract, you MAY find that your system MAY enter and or exit at
different levels in comparison to the real-time futures contract. The
bottom line is, would your system be actually trading on the real-time
futures contract ??!! THAT IS THE BOTTOM LINE!
So if anyone tries to "jam" their point of view in terms of which type of
contract to use, DO NOT listen to them, instead, DO YOUR OWN HOMEWORK. Only
YOU can determine which is the best type of continuous contract to use
because only YOU know what parameters your trading system needs to work
properly. If you trade and backtest on the "trust" or "belief" of anybody
else's opinion you are are well as DEAD.
Any trader worth their salt should perform this exercise prior to risking
money in the market or else GARBAGE IN = GARBAGE OUT
I hope this helps!
Robert Bianchi
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