Rollover Days ñ Are We All on the Same Page?
Rollover Days ñ Are We All on the Same Page?
All Futures contracts have expiration days where the contract literally stops trading. The Exchanges where the contracts trade are responsible for assigning positions to be delivered against for the commercial traders. Therefore, they would prefer to have as many speculators out of that contract before it expires as possible. This will help eliminate too many errors and possible delays in the delivery process for the commercial traders. To accomplish this task, they created a procedure called rollover day.
A rollover day is when the majority of the trading volume leaves the contract that will expire this quarter, and moves to the contract that will expire the next quarter. Rollovers usually occur 7-8 days before a contract actually expires. This allows the Exchanges time to match up the commercial traders' positions for either cash settlement or physical delivery on the contract expiration day.
Now let's look at some of the issues you will face on the actual rollover day itself:
ï Floor Trader Pivot Points
ï Previous Day High/Low
ï Globex High/Low
Before we begin with the above topics, there is another point to rollover days I would like to mention. It is not uncommon for these rollover days to occur during a holiday shortened week. For example, this recent rollover was the Labor Day holiday week. Monday was a holiday in the markets and we had the rollover on Thursday. Generally, these weeks tend to see slower volume since many market participants seem to extend their vacations. I am not going to say you should or should not trade on these rollover days, but I would like to show you some of the confusion and inconsistencies that occur on this day that leads me to think there are better days to trade.
This is a good time to bring up trading plans. After reading this article, I hope you can determine what charts you will use and be consistent in using them. Make sure you put in your trading plan how you will trade on these rollover days.
The Floor Trader Pivots that we use in class are also going to be skewed on rollover day. We will have to determine which chart we will view these levels on. You will get different levels looking at different charts on rollover day. The Pivots will use the previous day's High, Low and Close to calculate the levels. On rollover day, we began trading the December contract. If we were using the continuous contract symbol (automatically rolls charts over), the calculation will be from yesterday's prices and based on the September contract. Table 1 will show you the different Pivot levels and the High, Low and Closes for the different contract months:
To compensate for this, I would recommend you do not use charts near rollover that are contract expiration specific, for example, ESU10 for September or ESZ10 for December. Use the un-adjusted charts such as @ES=107XN. These are TradeStation specific symbols, so you may have to use different symbols on your charting platform. Using the un-adjusted chart will post the previous contract Pivots for the rollover day, and they will be the more accurate for trading that day.
The previous day's High, Low and Close are something that most of us plot on our charts at the beginning of each trading day. But which one is more important, the previous contract (September) or the new contract (December)?
We saw from Table 1 that the two contract months had different prices for each High, Low and Close. Since the previous month (September in this example) had more volume than December the day before rollover day, I would choose to use the September High, Low and Close prices for the next day's levels. Every day after the rollover day, we would begin using the December High, Low and Close prices.
Gaps are something else that will become distorted on this day. Notice in Table 1 the difference in the closing prices. September closed at a 4.75 point premium to December.
Figure 1 will show you an un-adjusted chart and the gap created after the rollover day. This is the chart you should be using on a rollover day if you decide to trade. Notice the gap difference is Open (1106.00) ñ Previous Close (1099.25) = Gap (6.75).
Now let's look at the December contract chart in Figure 2 and see the difference in the gap size compared to an un-adjusted continuous chart from Figure 1.
Notice the gap difference is Open (1106.00) ñ Previous Close (1094.50) = Gap (11.50). Look at Figure 1 and notice how the gap was closed easily. Figure 2 still has a gap on the chart. This is why I would recommend using an un-adjusted continuous chart, especially around rollover days.
The next area of concern is the Globex High and Low coming into the rollover day's trading session. The official exchange rollover does not start until 9:30 am EST, the day of the rollover. Many charting packages start the rollover at 16:30 EST the night before. This means in the morning when you come in to trade, the Globex range you see on your chart is from the new contract (December), and you should still be looking at the previous contract (September) until 9:30 am EST. Before the Regular Trading Hours (RTH) begin, you should open the previous contract (September) chart and make note of the Globex range for this morning's open.
These are a few of the things you will be faced with each contract rollover in the Futures markets. Whichever style of chart you decide to use, the key is to use it consistently. Do not be using different charts with each rollover. Fortunately, these rollovers only occur four times a year in the Stock Indexes (March, June, September and December). As a beginner, I would recommend watching a couple of these rollovers before trying to trade them.
In my opinion, there are so many cross currents happening on rollover days in the markets that I don't mind taking that day off, especially if the weather is nice and I can squeeze in a motorcycle ride. One of the reasons I like the Futures markets is because they are so transparent and we are all seeing the same information from the Exchange. The exception to this rule is rollover days. There are too many variations of charts to dilute market liquidity on that day. Since there is no uniform chart to look at, we might be losing some of the participants that might ordinarily be helping us out because they will be seeing levels and patterns at completely different prices. Once we are all on the same page, so to speak, after the rollover day, I am more confident about following my charts.
"Continuous effort ñ not strength or intelligence - is the key to unlocking our potential." - Frank Clark
Trade well and consistent,
- Don Dawson
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