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>I am currently changing my prospectus to allow trading of
>grains,metals,energies,etc. I was wondering what the people trading these
>markets use. As I see it the backadjusted method is fine for mov avg
>systems but is biased when testing a breakout system. A perpetual contract
>would be best but it appears the back months in many physicals are
extremely
>thin somewhat negating their price value - the meats/softs for example.
Speaking for energies:
a/ CL is pretty deep for back months that end in quarter-ends (Mar Jun Sep
Dec).
b/ The front 3 months on CL are pretty deep and can be patched together on
expiration day for a 2-3 tick adjustment.
c/ HU & HO the best 2 month sets are front and front+1. Again they can be
patched together with minimal adjustment.
d/ NG: Front month only.
You will sometimes see open interest in Qtr end back months for HU, HO and
NG but this is commercial activity and to be avoided if your signals are
derived from eod analysis. Back month settlements and intraday real time
prices have very little connection with each other. Back month bid-ask
spreads are also blown up huge (front month spread in futures of HU/HO is
5-10 ticks, back month is 50-80 ticks. CL front month is 2 ticks, back
months are 8-15 ticks depending on volatility.
Another feature that needs to be factored into this market is the change of
the forward curve - unlike interest rate markets or gold, this market
willingly goes from contango to backwardation and back - and stay that way -
due to genuine reasons. So signals generated by front month contracts taken
in very back month contracts will probably cause trouble more often than
not.
One other offbeat workaround is the construction of a strip (the average
price of a 6 month delivery schedule based on the average current price of
the 6 consecutive month futures contracts). That is, if you want to trade
strips with their attendant margin etc requirements.
2 pips worth.
Gitanshu
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