Backtesting for Futures.

Discussion in 'Strategy Development' started by Craig66, Jan 27, 2008.

  1. Craig66


    When I develop a strategy for Forex, I pick and instrument (e.g. EUR/USD) and an interval (say, last year), I then data mine this interval for something profitable.

    How would this work for Futures? with Futures you have multiple contracts with different expiry dates, how would one develop a strategy on this data? how do you pick the dataset(s)?
  2. lrm


    Standard practice is to use a continuous contract that has been adjusted using one of several well known methods: forward, backward, etc.

    This results in a price series that reflects (more or less) the movements of the particular contract, however the exact values of the price series are incorrect.

  3. Craig66


    Thank you for your answer, is it possible to point me at some reading material on the methods you mention?
  4. lrm


    Check out Jack Schwager's books on futures.

    A Complete Guide to the Futures Markets


    Schwager on Futures: Technical Analysis

    Also, just Google for continuous futures contracts, the first hit you see is:

    Take care,

  5. Craig66


    Cheers Louis, thanks for you help. :)
  6. Craig66,

    Watch out!. Even though for long term trading you have to use some form of continuous contracts, there are lots of potential pitfalls and gotchas using them. For example,

    1. you can't take a ratio (i.e. price[t]/price[t-100]) using absolute adjusted contracts.

    2.Depending on the technique you use to back adjust, you may get negative prices

    3.If you use backward adjusting, all your historical prices will change every time you have a new front month contract. This may cause you to get different backtest results using the exact same trading strategy

    Aside from the great suggestions lrm made, has a good discussion of some of these issues. Thomas Stridsmans 'Trading Systems That Work' also has a good explain


  7. Craig66


    Thank you to everybody for the pointers.
    In light of all this what are the advantages of automated futures trading given all the pitfalls associated with the back testing of systems?
  8. lrm


    Liquidity, leverage, and regulation. You can get the first two from most spot forex firms, but you don't get the regulation. These instruments are all traded on regulated exchanges, with published volume, open interest, etc.

    There may be more, but this is what comes to mind. Also, with futures you can gain exposure to different asset classes: equities (various index futures), commodities, currencies, and interest rates.

  9. Continous contracts certainly help but I've also often overwritten my futures models with cash models. The historic cash data is easier to obtain and no need for a continous contract. Look at Yahoo for archival prices on QQQ, .DJI, SPX, or other cash indicies. You can also do the same for FX...get fx cash prices on JPY to trade 6J. Models buildt this way won't help much for scalping but are effective for swing / postion trading.
    #10     Jan 28, 2008