Mechanics and Dynamics of Charting
represent disjointed data in a more meaningful manner. Here are some popular
approaches:■ (^) Unadjusted nearest‐futures contracts
■ (^) Back (or Spread) Adjusted continuous contracts
■ (^) Perpetual contracts
This simplest way to use charts of individual futures contracts is to just con-
nect the nearest contracts without accounting for the gap, that is, unadjusted with
respect to the price difference or spread between any two contracts. This approach
preserves the actual sequence of nearby contract prices. It also serves as an ac-
curate record of historical prices. Even so, it is not possible to apply technical
analysis in a meaningful way to such concatenations of disjointed contract prices.
It also makes back and forward testing impossible due to the gaps between prices,
which are not representative of the actual price flow. See Figure 3.38.
figure 3.37 Relative Strength Chart of the Continuous Daily Chart of Natural Gas
against the U.S. Natural Gas Fund.
Courtesy of Stockcharts.com
figure 3.38 Unadjusted Nearest Futures Chart.