mindful and consider whether the roll will have any impact on his strategy.
If he determines this to be the case, one simple way to deal with this is to
add in the estimated cost of the roll as additional slippage.
In the majority of cases, however, the roll is not much of a factor one
way or another on the performance of most trading strategies.
In summary, actual futures price contracts are unsuitable for long-term
testing for two reasons: They are too short and their volume and volatility
are not representative of that which is typically traded. Also, the expiration
of futures contracts requires the long-term strategy to perform rollover
trades to keep long-term positions intact.
A number of data solutions have been offered to solve the problems
that futures contracts present to the testing of strategies. The majority of
these solutions involve merging a patchwork of prices from the first expirations
into some form of continuous contract for the purposes of testing.
We will consider these various methods in the next sections.
THE CONTINUOUS CONTRACT
One solution to this problem is the continuous contract. This contract is a
sequential patchwork of successive individual futures contracts. For example,
in January of 2006, the continuous S&P contract had price data
from the March 2006 contract. In April of 2006, it had price data from
the June 2006 S&P contract. The continuous contract concatenates price
data from the most active front contract price expiration into a single price
history file.
The continuous contract solves two of the three major problems. It can
be as long as required. It has the front expiration contract prices and accurately
reflects the natural trading vehicle of most speculative traders. It
has one problem, however: The rollover price gap between the last close of
the expiring contract and the opening price of the new contract sometimes
appears as a large opening gap. This can result in a windfall profit or loss
in the simulation, when, in fact, that situation never existed in real trading.
If the strategist chooses to use the continuous contract for testing, this roll
gap must be taken into consideration.
THE PERPETUAL CONTRACT
Another popular solution is the perpetual contract. This contract is very
different from the continuous contract. It consists of a mathematical transformation
of price data which are, consequently, not real price data. Price
