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This may shock the hell out of most new system traders and really piss
off the rest of you, but it's true and undeniable. The continuos
contract data as well as the majority of data the industry uses (with
the blessing of the NFA and CFTC) is bullshit. The whole "back testing"
or "hypothetical trading" premise is so far from the truth that it
should be illegal to promote it. Never mind having the ability to
optimize any system based on a markets history. Unreal.
We don't need Monday morning Quarterbacks distracting us with their
claims of pie in the sky returns.
Paul B
Conrad Bowers wrote:
>
> Alberto Torchio wrote:
> >
> > Ken,
> >
> > > Are you saying that if all testing is done on back adjusted continous
> > > contracts, when trading the real deal you should then only take entry /
> > > exit signals from back adjusted CC's? This is preferable to taking
> > > signals from individual contracts, since individual contracts were not
> > > used in the back testing?
> >
> > The rationale behind backward adjusting continous contracts is that there should then be
> > no difference between single contracts and the continous. Or at least no major
> > difference, providing you consider commissions and slippage for roll-over when
> > backtesting with continous.
> > I hope that if I'm wrong someone explains (again) the whole matter.
> >
> > Alberto Torchio
> > Torino, Italy
>
> I must first admit to being a newbie but these are my thoughts:
>
> I believe cont. ctcts. properly take into account the $ P/L you
> will experience in a trade that you actually carried into a later
> contract (after adj for comm/slip.), *for a given date span*. But I
> believe there would be some differences in certain cases in the exact
> positions or dates held, between the two methods.
>
> Suppose you are trading a momentum system. There will be cases
> where the former contract will have a steeper slope in the price than
> the following contract for the same dates. So there might be a buy
> signal in the former contract and not the latter. The cont. contract
> will get you in just as you would have if you were watching the earlier
> contract. What about at rollover? You currently have a position in the
> former. If you were just switching "real" contracts, when you graphed
> the latter contract, you would say, "hey i don't have a signal here" and
> maybe not roll. With the cc you would keep the position altho likely
> your indicators would indicate a weakening trend. Depending how you
> systems functions you might or might not get out.
>
> There could be a similar situation where you would get a signal in
> the cc after rollover that you would not get in the individual ones.
> Suppose you buy if volatility decreases. Many times, I think, the
> former contract has somewhat higher volatility than later ones. So in a
> borderline case, your system might get excited just after the rollover
> thinking that vol. had narrowed, while actually part of that decrease
> was the contract shift. It might put you in a position that you would
> not otherwise have. This would be a "systematic" enough error that i
> think i would want to trade off of the cc's for a system like this if
> that is how i tested it. (by "systematic" i mean tending to be in the
> same direction - here more likely to take a pos. in the cc than the
> individual ones). It appear in this case that testing and trading the
> same way is important and that using the individual contracts might be
> better.
>
> An example where cc's might be better: suppose you trade a very
> longterm relative momentum (price change / daily range). You would not
> get accurate readings in the early parts of certain contracts that have
> little activity. (I'm thinking of something like 5 yr notes that seems
> to have negligible ranges before it becomes the front month- if i
> remember right). Perhaps here testing and trading cc's would be best.
>
> For some systems there may be differences in cc vs. individual
> contracts, but you may conclude that the differences are random. In
> this case i myself would at least consider trading on the individual
> contracts even if i had tested on the cc's, in the hopes of identifying
> the bullishness or bearishness of that particular contract month in this
> particular situation. But i may need to rethink that.
>
> I think the conclusion is that the different behavior will be limited
> to the initial days after the roll, equal to the length of time your
> indicators look back, but that such differences could be more common
> than expected. It seems that some thought about the particular
> system/indicators one is using might suggest a preference to one method
> or the other. Of importance is whether these differences are random,
> or are biased towards taking trades. If biased by the choice of data
> series, it seems wisest to then trade with the same data series; but if
> it's believed that the differences are random, one may prefer to test
> with cc's for convenience and trade the "real thing".
>
> Bottom line is that testing is approximate. Not only is the future
> variable but there are probably all kinds of approximations in the
> testing only some of which we can be aware of.
>
> Conrad
> Bowers
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