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Back-adjustment

Shifting all historical prices in a continuous futures series by the roll gap so the chart has no artificial jumps.

When a continuous-contract rolls, the vendor adds or subtracts the price difference between the old and new month across all prior history. Percentage changes and gap-free patterns are preserved; absolute historical prices are not.

The cost is that old prices become fictional. A long contango history back-adjusts downward, sometimes below zero, which breaks percentage-based indicators and any strategy that refers to a fixed price level.

Example: rolling from CLZ at $78 into CLF at $80 means every bar before the roll is raised by $2. After many years of rolls, a back-adjusted crude chart can show 2009 prices as negative even though oil never traded there.

Related: continuous-contract, roll-date, roll-yield, contango, backtesting

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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