The Perpetual ContractTM
posted under
Philosophy of Technical Analysis
by ceecabolos
An innovative solution to the problem of price continuity was developed by Robert Pelletier, president of Commodity Systems, Inc., a commodity and stock data service (CSI. 200 W. Palmetto Park Road, Boca Raton, FL 33422), called the Perpetual Contract.TM ("Perpetual ContractTM " is a registered trademark of that firm.)
The purpose of the Perpetual ContractTM is to provide years of futures price history in one continuous time series. That is accomplished by constructing a time series based on a constant forward time period. For example, the series would determine a value three months or six months into the future. The time period varies and can be chosen by the user. The Perpetual ContractTM is constructed by taking a weighted average of two futures contracts that surround the time period desired.
The value for the Perpetual ContractTM is not an actual price, but a weighted average of two other prices. The main advantage of the Perpetual ContractTM is that it eliminates the need for using only the nearest expiring contract and smoothes out the price series by eliminating the distortions that can take place during the transition between delivery months. For chart analysis purposes, the nearest-month continuation charts published by chart services are more than adequate. A continuous price series, however, is more useful for back-testing trading systems and indicators. A more complete explanation of ways to construct continuous futures contracts is provided by Greg Morris in Appendix D.
The purpose of the Perpetual ContractTM is to provide years of futures price history in one continuous time series. That is accomplished by constructing a time series based on a constant forward time period. For example, the series would determine a value three months or six months into the future. The time period varies and can be chosen by the user. The Perpetual ContractTM is constructed by taking a weighted average of two futures contracts that surround the time period desired.
The value for the Perpetual ContractTM is not an actual price, but a weighted average of two other prices. The main advantage of the Perpetual ContractTM is that it eliminates the need for using only the nearest expiring contract and smoothes out the price series by eliminating the distortions that can take place during the transition between delivery months. For chart analysis purposes, the nearest-month continuation charts published by chart services are more than adequate. A continuous price series, however, is more useful for back-testing trading systems and indicators. A more complete explanation of ways to construct continuous futures contracts is provided by Greg Morris in Appendix D.
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