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Fascinating read and a quick skim of the article index made me add the blog to my rss reader. Looks like quite a bit of interesting stuff in there. It amazes

by Sukotto 13y ago

Fascinating read and a quick skim of the article index made me add the blog to my rss reader. Looks like quite a bit of interesting stuff in there. It amazes me just how much more there is to learn, no matter how much I think I know about a topic. For example, I have never heard about the importance of smoothing the price between futures months. Even though I was in the front-office of a large energy trading firm for over 6 years[1]. (I lead a small tech team handling pre-trade research data so my experience was tangential to the actual trading). It seemed to me that the traders compartmentalized the trading months. They trade prompt right up to expiry, then they start trading a new prompt (of course they were also trading spot and other stuff, not only prompt month). Nobody ever seemed to care about the price disjunction when the month rolled. So I find this idea of different methods to smooth that price really interesting. What kind of trading are you doing where that matters? [1] and I really miss it. Hope I can go back to something like that again someday.

ewood 13y ago
It would not generally be of interest to discretionary traders (as you are likely describing) but for automated trading using statistical models it is important to be able to construct a continuous series. The sudden price jump from backwardation or contango contract shifts would otherwise appear to be a large price move. As the article points out the smoothing method chosen also matters in that ultimately some information is being lost so the smoothing method needs to match the model. I'm not sure what is meant by the rollover smoothing increasing transaction costs, this might have caused you some confusion if you're familiar with futures trading. Generally the actual mechanics of trading with the continuous series is that trade entries and exits and position sizing are calculated from the artificial continuous series and a trade that spans a roll will be rolled over (ie the previous contract position closed and a matching position in the new contract opened) on the roll date just as a traditional position would be. There would be no need to trade every day of the roll window, it would just be a paper exercise to come up with a proportional price for the artificial continuous contract.

by Sukotto 13y ago

ewood 13y ago

It would not generally be of interest to discretionary traders (as you are likely describing) but for automated trading using statistical models it is important to be able to construct a continuous series. The sudden price jump from backwardation or contango contract shifts would otherwise appear to be a large price move. As the article points out the smoothing method chosen also matters in that ultimately some information is being lost so the smoothing method needs to match the model. I'm not sure what is meant by the rollover smoothing increasing transaction costs, this might have caused you some confusion if you're familiar with futures trading. Generally the actual mechanics of trading with the continuous series is that trade entries and exits and position sizing are calculated from the artificial continuous series and a trade that spans a roll will be rolled over (ie the previous contract position closed and a matching position in the new contract opened) on the roll date just as a traditional position would be. There would be no need to trade every day of the roll window, it would just be a paper exercise to come up with a proportional price for the artificial continuous contract.