How to Trade Crude Oil: Trading StrategiesHow to Trade Crude Oil: Trading Strategies
Learning how to trade crude oil requires a nuanced understanding of its fundamental aspects, instruments, and trading strategies. This comprehensive article offers insights into the critical elements that affect crude oil prices, the range of instruments available for trading, and specific strategies traders use in this market.
The Basics of Crude Oil
Crude oil, often referred to as "black gold," is a fossil fuel derived from the remains of ancient organic matter. It serves as a crucial raw material for various industries, including transportation, chemicals, and manufacturing.
Two primary types of crude oil traded on global markets are West Texas Intermediate (WTI) and Brent Crude. WTI is primarily sourced from the United States and is known for its high quality and low sulphur content. On the other hand, Brent Crude originates mainly from the North Sea and serves as an international pricing benchmark.
The Organization of the Petroleum Exporting Countries (OPEC), which includes members like Saudi Arabia, Iran, and Venezuela, plays a pivotal role in determining global oil supply. By adjusting production levels, OPEC influences crude oil prices significantly. Additionally, other countries like Russia and the United States contribute to the world's oil supply, further affecting market dynamics.
What Time Does the Oil Market Open?
Like forex markets, crude oil trading hours are nearly 24/5. They’re typically highly liquid and offer traders multiple opportunities across a given day. For example, the New York Mercantile Exchange (NYMEX) opens for trading from Sunday evening to Friday afternoon, with a brief daily trading break.
Activity is most intense during the US session, which runs from 9:00 AM to 17:00 PM EST, and the European session, from 2:00 AM to 11:00 AM EST. These periods coincide with peak market activity and are generally the most volatile, with the overlap between the US and European sessions (between 9:00 AM and 11:00 AM EST) offering the greatest volatility and trading activity.
Factors Affecting Crude Oil Trading
In oil trading, economics is a fundamental aspect that traders need to grasp to make educated decisions. Several factors drive the price of crude oil, and here are some of the most significant:
- Supply and Demand: At its core, the price of crude oil is determined by how much of it is available (supply) versus how much is wanted (demand). An oversupply can depress prices, while high demand can cause prices to spike.
- Geopolitical Events: Conflicts, wars, and diplomatic tensions in oil-producing regions can disrupt supply chains, affecting prices. For instance, sanctions on Iran or instability in Venezuela can push prices higher.
- Currency Fluctuations: Oil prices are generally quoted in US dollars. A strong dollar can make oil more expensive for countries using other currencies, thereby affecting demand.
- Seasonal Changes: During winter, demand for heating oil can rise, pushing crude oil prices up. Conversely, a mild winter might result in lower demand and prices.
- Technological Advances: Innovations in extraction methods, such as fracking, can alter the supply landscape, making it easier to extract oil and thereby affecting prices.
- OPEC Decisions: As previously mentioned, OPEC has a significant influence on oil prices. Their production quotas can tighten or flood the market, causing price swings.
- Economic Indicators: Data like unemployment rates, manufacturing output, and interest rates can indicate the health of an economy, which in turn can affect oil consumption and prices.
- Environmental Policies: Increasing regulations and policies aimed at reducing carbon emissions and promoting renewable energy sources can impact the demand and supply of crude oil, thereby influencing prices.
- Natural Disasters: Events such as hurricanes, earthquakes, and other natural disasters can disrupt oil production and supply chains, leading to fluctuations in crude oil prices.
- Global Economic Growth: The overall growth of the global economy plays a critical role in crude oil demand. Economic booms often lead to higher energy consumption, driving up oil prices, while economic slowdowns can reduce demand and lower prices.
How Is Crude Oil Traded?
When learning how to trade oil, traders have a variety of instruments to choose from.
CFDs
Contracts for Difference (CFDs) are popular instruments when trading crude. CFDs are used by traders to speculate on price movements without owning the underlying asset. Essentially, a CFD is a contract between a trader and a broker to exchange the difference in price from the point the position is opened to when it is closed. One of the key benefits is the use of leverage, which means traders can control a larger position with a smaller initial investment, amplifying both potential returns and losses.
Margin requirements vary by broker but are typically lower for CFDs on oil compared to some other instruments. This makes it appealing for crude oil day trading strategies, where traders aim to capitalise on short-term price movements. However, managing risk effectively is crucial, as the leveraged nature of CFDs can result in significant losses if the market moves against you.
At FXOpen, we offer both CFDs on WTI Crude oil and Brent Crude. Head over there to explore a world of trading tools and other assets beyond crude oil.
Futures
Futures contracts are another well-established avenue for trading crude oil. Unlike CFDs, futures are standardised agreements to buy or sell a specific quantity of oil at a predetermined price at a set date in the future. They are traded on regulated exchanges, providing an added layer of transparency and security.
Spot Market
In spot trading, one buys or sells crude oil and takes immediate delivery and ownership. Unlike futures and CFDs, there's no leverage in spot trading, making it a less risky option. However, the absence of leverage requires a higher initial investment. While retail traders often avoid spot trading due to storage and transportation challenges, it's commonly used by entities directly involved in production or consumption. This method is more straightforward but demands the logistical capabilities that individual traders usually lack.
ETFs
Exchange-traded funds (ETFs) offer an alternative for those interested in the crude oil market without dealing with futures contracts or physical ownership. Crude oil ETFs typically track the price of oil or related indices by holding futures contracts or a blend of oil company stocks. This allows investors to indirectly gain exposure to oil price movements with less complexity.
Investing in a crude oil ETF can provide a degree of diversification, as these funds may also include assets like bonds or other commodities in their portfolio. However, it's essential to be aware of the management fees and potential tracking errors in the ETF's performance compared to the actual commodity.
Stocks
Another route to gain exposure to the crude oil market is by investing in the stocks of companies involved in the industry. This includes major producers, refineries, and even transportation companies. By owning shares in these businesses, investors are indirectly influenced by crude oil prices. To use an example, a rise in oil prices often boosts the profitability of oil-producing companies, potentially leading to stock price appreciation.
Unlike trading futures or CFDs, investing in stocks means actually owning a piece of the company, often with the added benefits of dividends. However, conducting thorough research is crucial, as these stocks can be affected by company-specific risks in addition to oil price movements.
Crude Oil Trading Strategies
Given the volatile nature of crude oil prices, traders employ specific strategies to capitalise on price fluctuations. Here are some strategies that may be useful for crude oil trading:
Trend Following with Moving Averages
The trend is your friend, especially in commodities like crude oil. This is a well-known technique but it may be very useful for commodity trading. One effective way to follow the trend is by using moving averages, such as the 50-day (blue) and 200-day (orange). When the 50-day crosses above the 200-day, it's generally a bullish signal, and vice versa for a bearish trend. However, as with all technical analysis tools, moving averages can sometimes trigger false signals.
Range Trading
Due to supply-demand dynamics and geopolitical factors, crude oil prices often fluctuate within a specific range. Identifying these ranges can be useful for short-term trading. Traders buy at the lower end of the range and sell at the higher end, applying technical indicators like RSI or Stochastic Oscillator for entry and exit signals.
News-Based Trading
In crude oil markets, news about OPEC decisions, US oil inventory data, geopolitical tensions, and technological advancements can dramatically impact prices. Traders keeping an eye on oil news can take advantage of sudden announcements or an economic release likely to push prices in a particular direction. Given the high leverage commonly available in CFD trading, this strategy can be effective but also comes with significant risk.
Trade Crude Oil at FXOpen
Trade WTI and Brent Crude oil CFDs at FXOpen to take advantage of our competitive spreads, high liquidity, and lightning-fast execution speeds.
We offer four different trading platforms, MetaTrader 4, MetaTrader 5, TickTrader, and TradingView, each with desktop, web-based and mobile versions for access anytime and anywhere. Take advantage of advanced technical analysis tools, including many trading tools and expert advisors for automated trading.
Traders can rest easy knowing that FXOpen is also regulated by the FCA in the UK, CySEC in Cyprus, and is licensed to provide financial services in Australia: AFSL 412871 – ABN 61 143 678 719. Start trading oil and gas commodity CFDs with confidence at FXOpen and explore a world of trading opportunities across more than 600 markets.
To access Crude Oil markets with competitive spreads and rapid execution speeds, consider opening an FXOpen account today and step confidently into the world of crude oil trading.
The Bottom Line
In crude oil trading, having the right strategies and tools is essential. By understanding the fundamentals, market dynamics, and utilising specific trading techniques, you are now equipped with the knowledge you need to get started!
FAQ
How to Trade Brent Crude Oil?
To trade Brent Crude oil, you can use various instruments such as futures contracts, CFDs, ETFs, or stocks of oil companies. Most retail traders use CFDs, which provide a way to speculate on price movements without owning the asset. CFDs also allow for leverage, which can amplify both potential gains and losses.
What Is the Brent Oil Trading Strategy?
A common Brent oil trading strategy involves trend following using moving averages. For instance, traders use the 50-day and 200-day moving averages to identify bullish or bearish trends. Range trading and news-based trading are also popular strategies.
What Hours Does Crude Oil Trade?
Crude oil trades nearly 24/5. The New York Mercantile Exchange (NYMEX) operates from Sunday evening to Friday afternoon with a daily break. The most active trading occurs during the US session (9:00 AM to 2:30 PM EST) and the European session (6:00 AM to 11:00 AM EST).
What Is the Best Time to Trade Brent Crude Oil?
According to theory, the best time to trade Brent Crude oil is during the overlap of the US and European sessions, from 9:00 AM to 11:00 AM EST, when market liquidity and volatility are highest. However, you should consider fundamental factors as they can lead to unexpected price movements.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Crude Oil
Options Blueprint Series [Intermediate]: US Election Oil Play1. Introduction
The 2024 US Presidential Election could have a significant impact on global markets, especially energy sectors like crude oil. With key policies and geopolitical tensions hinging on the outcome, many traders are eyeing a potential price surge in WTI Crude Oil futures. Our prior article (linked below) presented a potential opportunity for crude oil prices to rise by over 40% within a year following the election. This could bring WTI Crude Oil Futures (CLZ2025) from its current price of 67.80 to around 94.92.
To capitalize on this potential opportunity, a strategic options play can be used to leverage this potential move, providing not only a chance to profit from a bullish breakout but also some protection against downside risk. This article explores a Breakout Booster Play using options on the December 2025 WTI Crude Oil futures contract (CLZ2025), designed to benefit from a possible post-election oil price surge.
2. Technical Overview
In analyzing the December 2025 WTI Crude Oil Futures (CLZ2025), a strong support level is identified. The 61.8% Fibonacci retracement level aligns perfectly with a UFO support zone at 55.62, suggesting a significant area where buying interest could emerge if prices fall to this level.
The current price of CLZ2025 is 67.80, and the technical analysis points to the possibility of a substantial bullish move following the 2024 US Presidential Election. The projected price increase of 40% could push crude oil prices up to 94.92 over the next year. However, even a more conservative target of 20% (around 81.36) could offer considerable upside potential.
This analysis provides the foundation for constructing an options strategy that not only takes advantage of the potential upside but also offers a buffer zone against downside risk by capitalizing on key support levels.
3. The Options Strategy
The options strategy we'll use here is a Breakout Booster Play designed to take advantage of the expected rise in crude oil prices. Here's how the strategy is constructed:
1. Sell 2 Puts at the 55 Strike:
Expiring on November 17, 2025, these puts are sold to collect a premium of approximately 3.27 points per contract.
By selling 2 puts, we collect a total of 6.54 points.
This creates a buffer zone, allowing us to take on some downside risk while still profiting if prices remain above 55.
2. Buy 1 Call at the 71 Strike:
Also expiring on November 17, 2025, the call is purchased for 6.28 points.
This call gives us the potential for unlimited upside if crude oil prices rise above 71.
Net Cost: The net cost of this strategy is minimal, with the collected premium from the puts (6.54) offsetting most of the cost of the call (6.28). The result is a credit of 0.26 points, meaning the trader gets paid to enter this position.
Break-Even Points:
The position would lose money only if crude oil falls below 54.87 (factoring in the premium collected).
Profit potential becomes significant if crude oil rises above 71, with large gains expected if the projected move to 81.36 or 94.92 materializes.
This strategy effectively positions the trader to profit from an upward breakout while maintaining a buffer against downside risk. If crude oil drops, losses are limited unless it falls below 54.87, at which point the trader would be required to take delivery of 2 crude oil futures contracts (long).
4. Profit and Risk Analysis
Profit Potential:
The key advantage of this options strategy is its profit potential on the upside. If crude oil prices rise above 71, the purchased call will start gaining value significantly.
If crude oil reaches 94.92 (a 40% increase from the current price), the long call will be deep in the money, resulting in substantial profits.
Even if the price rises more conservatively to 81.36 (a 20% increase), the strategy still allows for meaningful gains as the call appreciates.
Since the net entry cost is essentially zero (with a small credit of 0.26 points), the potential profit is high, and it becomes especially powerful above 71, with unlimited upside.
Risk Management:
This strategy comes with a 19% buffer before any losses occur at expiration, as the break-even point is 54.87. However, it is important to note that if the trade is closed before expiration, losses could be realized if crude oil prices have dropped, even if the price is above 55.
Risk Pre-Expiration: If crude oil prices fall sharply, especially before expiration, the trader could face significant losses. The risk is theoretically unlimited because, as the market moves against the sold puts, their value could rise dramatically. If a trader needs to close the position early, those puts could be worth significantly more than the premium initially collected, resulting in losses.
Potential Margin Calls: If crude oil drops far enough, the trader may receive a margin call on the short puts. This could happen well before the price reaches 54.87, depending on the speed and size of the drop. If not managed properly, this could force the trader to close the position at a significant loss.
While there is a built-in buffer, this trade requires active monitoring, particularly if crude oil prices start to decline. Risk management techniques, such as stop-loss orders, rolling options, or hedging, should be considered to mitigate losses in case the market moves unexpectedly.
5. Contract Specs and Margins
WTI Crude Oil Futures (CL)
Tick Size: The minimum price fluctuation is 0.01 per barrel.
Tick Value: Each 0.01 movement equals $10 per contract.
Margin Requirement: Approximately $6,100 per contract (subject to change based on market volatility).
Micro Crude Oil Futures (MCL)
Tick Value: Each 0.01 movement equals $1 per contract.
Margin Requirement: Approximately $610 per contract, offering a lower capital requirement for smaller positions.
Why Mention Both?
Traders with larger capital allocations may prefer using standard WTI Crude Oil futures contracts, given their greater exposure and tick value. However, for smaller or more conservative traders, Micro Crude Oil Futures (MCL) provide a more accessible way to enter the market while maintaining the same exposure ratios in a smaller size.
6. Summary and Conclusion
This options strategy provides a powerful way to capitalize on a potential post-election rally in crude oil prices, while offering downside protection. The combination of selling 2 puts at the 55 strike and buying 1 call at the 71 strike, all expiring on November 17, 2025, creates a structured approach to profit from a bullish breakout.
With current analysis based on machine learning suggesting a potential 40% increase in crude oil prices over the next year, the long call offers unlimited profit potential above 71. At the same time, the sale of the puts at the 55 strike gives the strategy a 19% buffer, with the break-even point at expiration being 54.87.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com - This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
Exploring Bearish Plays w/ Futures, Micros & Options on FutureIntroduction
The WTI Crude Oil futures market provides various avenues for traders to profit from bullish and bearish market conditions. This article delves into several bearish strategies using standard WTI Crude Oil futures, Micro WTI Crude Oil futures contracts, and options on these futures. Whether you are looking to trade outright futures contracts, construct complex spreads, or utilize options strategies, this publication aims to assist you in formulating effective bearish plays while managing risk efficiently.
Choosing the Right Contract Size
When considering a bearish play on WTI Crude Oil futures, the first decision involves selecting the appropriate contract size. The standard WTI Crude Oil futures and Micro WTI Crude Oil futures contracts offer different levels of exposure and risk.
WTI Crude Oil Futures:
Standardized contracts linked to WTI Crude Oil with a point value = $1,000 per point.
Suitable for traders seeking significant exposure to market movements.
Greater potential for profits but also higher risk due to larger contract size.
TradingView ticker symbol is CL1!
Margin Requirements: As of the current date, the margin requirement for WTI Crude Oil futures is approximately $6,000 per contract. Margin requirements are subject to change and may vary based on the broker and market conditions.
Micro WTI Crude Oil Futures:
Contracts representing one-tenth the value of the standard WTI Crude Oil futures.
Each point move in the Micro WTI Crude Oil futures equals $100.
Ideal for traders who prefer lower exposure and risk.
Allows for more precise risk management and position sizing.
TradingView ticker symbol is MCL1!
Margin Requirements: As of the current date, the margin requirement for Micro WTI Crude Oil futures is approximately $600 per contract. Margin requirements are subject to change and may vary based on the broker and market conditions.
Choosing between standard WTI Crude Oil and Micro WTI Crude Oil futures depends on your risk tolerance, account size, and trading strategy. Smaller contracts like the Micro WTI Crude Oil futures offer flexibility, particularly for newer traders or those with smaller accounts.
Bearish Futures Strategies
Outright Futures Contracts:
Selling WTI Crude Oil futures outright is a straightforward way to express a bearish view on the market. This strategy involves selling a futures contract in anticipation of a decline in oil prices.
Benefits:
Direct exposure to market movements.
Simple execution and understanding.
Ability to leverage positions due to margin requirements.
Risks:
Potential for significant losses if the market moves against your position.
Mark-to-market losses can trigger margin calls.
Example Trade:
Sell one WTI Crude Oil futures contract at 81.00.
Target price: 76.00.
Stop-loss price: 82.50.
This trade aims to profit from a 5.00-point decline in oil prices, with a risk of a 1.50-point rise.
Futures Spreads:
1. Calendar Spreads: A calendar spread, also known as a time spread, involves selling (or buying) a longer-term futures contract and buying (or selling) a shorter-term futures contract with the same underlying asset. This strategy profits from the difference in price movements between the two contracts.
Benefits:
Reduced risk compared to outright futures positions.
Potential to profit from changes in the futures curve.
Risks:
Limited profit potential compared to outright positions.
Changes in contango or backwardation could hurt the position.
Example Trade:
Sell an October WTI Crude Oil futures contract.
Buy a September WTI Crude Oil futures contract.
Target spread: Decrease in the difference between the two contract prices.
In this example, the trader expects the October contract to lose more value relative to the September contract over time. The profit is made if the spread between the December and September contracts widens.
2. Butterfly Spreads: A butterfly spread involves a combination of long and short futures positions at different expiration dates. This strategy profits from minimal price movement around a central expiration date. It is constructed by selling (or buying) a futures contract, buying (or selling) two futures contracts at a nearer expiration date, and selling (or buying) another futures contract at an even nearer expiration date.
Benefits:
Reduced risk compared to outright futures positions.
Profits from stable prices around the middle expiration date.
Risks:
Limited profit potential compared to other spread strategies or outright positions.
Changes in contango or backwardation could hurt the position.
Example Trade:
Sell one November WTI Crude Oil futures contract.
Buy two October WTI Crude Oil futures contracts.
Sell one September WTI Crude Oil futures contract.
In this example, the trader expects WTI Crude Oil prices to remain relatively stable.
Bearish Options Strategies
1. Long Puts: Buying put options on WTI Crude Oil futures is a classic bearish strategy. It allows traders to benefit from downward price movements while limiting potential losses to the premium paid for the options.
Benefits:
Limited risk to the premium paid.
Potential for significant profit if the underlying futures contract price falls.
Leverage, allowing control of a large position with a relatively small investment.
Risks:
Potential loss of the entire premium if the market does not move as expected.
Time decay, where the value of the option decreases as the expiration date approaches.
Example Trade:
Buy one put option on WTI Crude Oil futures with a strike price of 81.00, expiring in 30 days.
Target price: 76.00.
Stop-loss: Premium paid (e.g., 2.75 points x $1,000 per contract).
If the WTI Crude Oil futures price drops below 81.00, the put option gains value, and the trader can sell it for a profit. If the price stays above 78.25, the trader loses only the premium paid.
2. Synthetic Short: Creating a synthetic short involves buying a put option and selling a call option at the same strike price and expiration. This strategy mimics holding a short position in the underlying futures contract.
Benefits:
Similar profit potential to shorting the futures contract.
Flexibility in managing risk and adjusting positions.
Risks:
Potential for unlimited losses if the market moves significantly against the position.
Requires margin to sell the call option.
Example Trade:
Buy one put option on WTI Crude Oil futures at 81.00, expiring in 30 days.
Sell one call option on WTI Crude Oil futures at 81.00, expiring in 30 days.
Target price: 76.00.
The profit and loss (PnL) profile of the synthetic short position would be the same as holding a short position in the underlying futures contract. If the price falls, the position gains value dollar-for-dollar with the underlying futures contract. If the price rises, the position loses value in the same manner.
3. Bearish Options Spreads: Options offer versatility and adaptability, allowing traders to design various bearish spread strategies. These strategies can be customized to specific market conditions, risk tolerances, and trading goals. Popular bearish options spreads include:
Vertical Put Spreads
Bear Put Spreads
Put Debit Spreads
Ratio Put Spreads
Diagonal Put Spreads
Calendar Put Spreads
Bearish Butterfly Spreads
Bearish Condor Spreads
Etc.
Example Trade:
Bear Put Spread: Buying the 81.00 put and selling the 75.00 put with 30 days to expiration.
Risk Profile Graph:
This example shows a bear put spread aiming to profit from a decline in WTI Crude Oil prices while limiting potential losses.
For detailed explanations and examples of these and other bearish options spread strategies, please refer to our published ideas under the "Options Blueprint Series." These resources provide in-depth analysis and step-by-step guidance.
Trading Plan
A well-defined trading plan is crucial for successfully executing any strategy. Here’s a step-by-step guide to formulating your plan:
1. Select the Strategy: Choose between outright futures contracts, calendar or butterfly spreads, or options strategies based on your market outlook and risk tolerance.
2. Determine Entry and Exit Points:
Entry price: Define the price level at which you will enter the trade (e.g., breakout, UFO resistance, indicators convergence/divergence, etc.).
Target price: Set a realistic target based on technical analysis or market projections.
Stop-loss price: Establish a stop-loss level to manage risk and limit potential losses.
3. Position Sizing: Calculate the appropriate position size based on your account size and risk tolerance. Ensure that the position aligns with your overall portfolio strategy.
4. Risk Management: Implement risk management techniques such as using stop-loss orders, hedging, and diversifying positions to protect your capital. Risk management is vital in trading to protect your capital and ensure long-term success.
Conclusion
In this article, we've explored various bearish strategies using WTI Crude Oil futures, Micro WTI Crude Oil futures, and options on futures. From outright futures contracts to sophisticated spreads and options strategies, traders have multiple tools to capitalize on bearish market conditions while managing their risk effectively.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
How to Identify Buying spot and Trading Psychology - USOILThis chart study is only for educational purpose please do your own study before taking any trades
A Renko Trading Strategy with Multiple Indicators (Update 3)An update from the last summary: Stating the obvious but the recurring pattern did not play out.
This was a painful past couple of days but some realizations that I will walk through here for anyone who may be on a similar journey or realizations.
“Buy high and sell low” or “buy support and sell resistance” are simple words to speak, to walk through in back testing, but, in the heat of the moment with live data and markets unfolding in ways you weren’t expecting make these phrases an near impossible accomplishment.
As for the chart setup, I’ve with the following for the Renko WTI/CL chart:
25 tick block size and a 15-minute timeframe (more on this later)
DEMA at 12 and 20
MA at 20 with a 9 period (or block in case of Renko) WMA
Stoch of 5,3,3 and 25,3,3
DMI of 5,5
Bull Bear Power at 25 (this is new and seems to provide good insights)
Wednesday and Thursday had me watching the Renko charts waiting for an opportunity to go short (remember, my trading style is to buy either Calls or Puts as near to the money as possible and at least 3 to 4 months out). From the patterns I saw on the Renko, I firmly believed that the market was ready to sell off and I wanted to be in. As an aside, I cap my losses at 10% of the price I pay for the option.
In my losses this week, I realized that my strategies for every period of time that I’ve tried to trade had basically been a breakout trader. It wasn’t that I made a definitive statement of “Hey, my methodology is that of a breakout trader” but more like “Hey, I need to see confirmation of the price movement before I enter”. The problem is that the confirmation I was looking for was well after price had started moving and, as I looked at it, it was what could be classified as a breakout. And it was in my 3rd loss for the week, that I realized what I was doing wasn’t working. Sure, I could find points in time where it would have seemed to work but not this week. As closed out my 3rd loss, I read back through some items I had highlighted in the “Pivot Boss” book referenced earlier and in it found the pages were I had marked up the callout that you have to buy at support and sell into resistance if your going to succeed. It seem intuitive but in reality, it goes completely against my nature while trying to find an entry point with live data flying by.
By now, if you’ve read this far, you may have picked out some items that resonate with you or you may be finding this as a serious source of entertainment :D
For the discussion that continues, you’ll need to reference the previous article I wrote to see the specific charts before the price action on Thursday. The following link will give you view of how price played out.
The red rectangle outline on the chart is where I was looking for price to repeat a similar pattern noted in the related article. How simple (and unrealistic) could this be. What played out was a price movement that I didn’t know how to handle and took me some time to figure out where to get in. As price continued to go up, I realized this was where I would usually just try to get in and then, I would get in at a intra-day high, have price pull back and 10-20% of my option value hit and I’d be out just to watch the market reverse. So, on this day, I resolved myself not to make a trade unless I could figure out this “buy support and sell resistance” thing. In my resolve, I agreed to some points:
I will only buy at support and will sell into resistance: (the hardest concept known to man, not in understanding but execution)
The key must be in the Camarilla Pivots so use them and the system that is outlined in the book. Or, as close as you can with how you want to trade.
Renko chart setting will stay at 25 ticks for a block size and 15 minutes for a timeframe. What does this mean for Renko in TV? It means that price of a 25 tick increment must be held for 15 minutes before the block is committed or printed.
Because volume profile and camarilla pivots are not a natural fit on the Renko charts, I’ll create a candle chart side-by-side to the Renko chart and then place all of these indicators on it. Additionally, all of the mark-ups I do for projecting the volume area on the chart and the opening range will be done on the candle chart
The Renko chart will continue to have the indicators I track on it but they will be for confirmation and helping to form an opinion of the market and nothing to do with entry or exit. Remember, I want to buy support and sell resistance and not breakouts.
I wanted to have multiple periods of levels on my candle chart so I included 3 sets of camarilla, a daily, weekly, and monthly set of levels.
The next big decision I had to make was the timeframe for the candle chart itself. After much experimentation and debate with myself, I landed with the following:
Start with an hourly chart. The first general notion of entry and if at support or resistance will come from the hourly chart.
I will continue with my volume area and opening range markup but it will be for a weekly timeframe. Meaning that the volume profile indicator is set to weekly and I use the first 5 hours of the week to set the opening range. From these markups I’ll create an opinion of the coming week and a trading plan based on what I see. Then, I’ll let price movement between the camarilla pivots prove out my opinion or lead me to adjust it.
Once I find a potential trigger, I will switch the 1hr candle chart to a 5 minute candle chart and look for candle setups to trigger the actual trade.
What do I use for triggers and how to I decide where to look? The following chart is a bit of an eye chart but you get the idea. With the 3 camarilla pivots plus a year pivot, you can see the various levels. While it may seem like a confused mess, there is some method to the madness.
The Camarilla pivots in TV allow you to color code the levels plus set the size or pixel width of the lines of the levels. For all periods, I set the pivot to black, R1/S1 and R2/S2 to purple and then based on the book’s recommendation, R3/S4 to red, R4/S3 to green, and R5/S5 to blue. For the daily, week, monthly, and yearly pivots, I set their pixel width to 1px, 2px, 3px, and 4px respectively. This is how I get a visual clue on what timeframe price is approaching (by the width) and the type of triggers or market behavior I should be looking for based on the color.
I will use the weekly, monthly, and hourly pivots to look for price levels of support or resistance. It will be at these levels that I’ll look for price action to provide insight as to what the market wants to do with the level (there is a good discussion in the “Pivot Boss” book on identifying candle patterns that distills a lot of complexities of endless chapters of concepts into a few simple ones in one chapter).
Once I see some type of candle pattern on the 1 hour chart that could indicate a trigger to enter, I change it to a 5 minute chart to find a pattern in the price movement of the next candle to make the entry. In theory, this should provide me with an entry at support; don’t wait for a confirmation via a breakout.
So, why mess with the Renko charts then? Fair enough of a question; I believe that the Renko chart setup will filter noise out of the view and provide a cleaner view of support and resistance lines due to the nature of its makeup. If you follow along with any of this in your own charts, you will begin to see that the pivots begin to form identifiable lines of support and resistance in the Renko chart. And, back to the point that the Renko setup I have with the specific indicators and their settings seem to provide a good path toward confirmation of trends and positions.
Another key issue I was struggling with was how to correlate the Renko chart with the candle chart. This is where I came up with the 5-minute chart which, after thinking about it, I realized that the 5-minute chart would reconcile nicely with the 15-minute Renko chart. If you look at how Renko charts are printed, they will print on the time frame that you set so, if a brick prints, it should do so on a :15-minute boundary. And, the 5-minute candle will correlate to it. The next chart shows the Renko with the 1hr candle side-by-side with the same rectangle. The rectangle on the 1hr is a reasonable estimate but squarely in the middle is an interesting candle formation that happens to be near the daily S5 and the weekly R1.
I looked at this for awhile in real-time and thought, how do you really decide to make this trade? It seems like price has moved further from the trigger before you have the nerve to pull the trigger on the trade. Plus, if you look at the DEMA on the Renko at this time, it’s still set bearish with 20 above the 12 and the -DI was still swapped above the +DI. All things I’ve used in the past and now causing paralysis in pulling the trigger in a “buy at support” trade.
The next is the same chart setup but I’ve switched to the 5 minute view and have adjusted the red rectangle in the candle chart a little.
The candle chart shows the boundary of the lowest red brick, the one red brick to the left and the two green bricks to the right. In this price action, candle on the one hour chart (engulfing is corroborated by the extended wick of the green brick that is the first reversed color in the down move. However, with the DEMA swapped bearish, what would lead you to look to buy on this. There are valid cases where price continues down from the one green brick. This is where the importance of the camarilla pivots along with the 5 minute chart come in.
With the engulfing candle on the 1-hour chart and the green brick on the Renko, what I should have done is use the 5-minute chart with the various pivots to find support and candle patterns to enter the market long. This would have been fulfilling the mantra of “Buy Support; Sell Resistance”.
The following chart zooms in to both the Renko and the 5-minute candle in hopes to show details of how to get from potential triggers to confirmations and physical entries with tighter reins on the stops to guard more on the ‘Hope this will work’ strategy.
By using the 15-minute Renko and the 5-minute chart, I can now see exactly what’s going on in the Renko bricks to get a better feel of what the market is doing. The blue double arrow on the Renko correlates with the 5-minute candle. With the first green brick being a trigger, then the key is to look at what is going on once that brick prints to see how price behaves around the Camarilla pivots.
The green dashed line is the time that the first green brick printed (committed, good to go). So, what is important is to now watch the price to find a setup to enter. Or we see the market push through the support of the camarilla pivots that are in close proximity and begin the search for an entry short.
The chart below is zoomed in even more on the candle chart with the daily Camarilla S4 which, from a daily context, is the last level of support before more sellers hop in and drive price lower. I’ve outlined this pivot in a green rectangle and here you can see price action and find some interesting setups. I’ve put some black arrows at some of the more interesting candles and those which are probably some type of reversal patters of 2 or 3 in nature.
I’ll end this here but have more in my notes that I’ll include in a future update.
A Renko Trading Strategy with Multiple Indicators (update 2)Repeatable patterns. Something to watch on the 25 tick / 15 minute Renko chart for CL. This first image is late January. I’ve marked some areas of interest and where we could be in the pattern and something to watch.
This is from today’s price action.
Pay close attention to the action of the indicators between the two highlighted periods of time.
A Renko Trading Strategy with Multiple Indicators (update 1)This will serve as an update to the previous discussion specifically to some of the chart settings and the approach.
Going into the open on 25-March-2024, I was looking for price to move lower to test the monthly and yearly Camarilla R3. My reasoning was that neither seemed to have been tested yet and that these two together would provide a good level for support. My long term view on crude oil is bullish and I believed this type of action would provide a good entry point.
However, this plan did not come through so I stood aside to let the market playout to determine another entry strategy. While watching the market in the charts I had published earlier, I decided to make some adjustments to see if I would have detected the market’s plan sooner providing an entry point. The following are the changes that I’ve made:
Changed the timeframe of the Renko chart from 15 minutes to 1 minute. Without paying for a higher subscription in TV, 1 minute is as low of a timeframe as you can go with Renko. This alone changed the dynamics of the chart with a different view on the DMI and Stoch.
Changed the slower Stoch from 25,3,3 to 50,3,3 (which is a setting I’ve experimented with in the past.
The DMI remained the same as did the levels of importance for the ADX of 35 and 20.
Added the BPP (Bull Bear Power) indicator and set it to an interval of 50. I’ve not used this indicator before but was experimenting with some items yesterday and found this. I set the line to a step line and you can see the results here.
Added a 2-hour candle chart next to the Renko and will use it in conjunction with the Renko chart to make entry/exit decisions.
Removed the manual Linear Regression from the Renko chart and have added them to the 2hr chart. This is a more natural fit and have maintained the default settings. I have added two LR indicators with one at 1 STD and one at 2 STD.
Removed the manual drawings of the Camarilla pivots and have added them as indicators to the 2hr chart.
Removed the volume profile from the Renko chart and have added it to the 2hr chart with a week timeframe.
All markup for volume area, opening range, etc. will be put on the 2hr chart and will be for a weekly view.
The Renko chart will remain to work for timings of entry and exits. Considering the 1-minute chart, you can see that there was a buy signal across several of the setups.
As noted earlier, the consolidation on the 1 minute/25 tick Renko chart provided a signal that a breakout was coming. The slower Stoch set to 50,3,3 provided some insight into the direction with the break of the %k up over the %d and lastly, the new BBP gave an indication that the down move was a correction and that higher prices could be coming.
A long wick and breakout of consolidation would have been a trigger to enter a trade of buying a Call option (see green arrow on Renko).
Looking at the 2hr candle chart with the 2 linear regressions (1 and 2 STD respectively), then you can see where the support was formed then then where resistance was hit. The monthly and the weekly R4 provided resistance and now support is at the median of the current LR.
Because the break of the weekly R3 was with a force with no test, my plan now is to find an entry long (an August Call) along this line which is also the same proximity of the weekly Pivot and the top of the week’s opening range (where the opening range for the week is defined as the first 5 2hr candles of the week.
With a red brick in place on the 1 minute/25 tick chart, a green brick now would be a buying opportunity. I’ve added a consolidation channel across levels of what could be support for any pullback and could see another 25-tick brick in place before the green brick to the upside.
A Renko Trading Strategy with Multiple IndicatorsThis study will walk through several concepts in analyzing crude oil. The primary chart type will be a Renko chart with the block size (ticks) set to 25 (0.25 in TV) and with a timeframe set to 15 minutes. The significance of timeframe is that in TV, it will take this amount of time for the price to maintain a full block change (25 cents) in order for it to be ‘printed’. In times of high volatility, a 15-minute window can allow for more than one block to print at the same time. While this may be a disadvantage in trading CL futures either day or swing trading, it helps filter out noise in the type of trading I do. The basic strategy I’m wanting to establish using this setup is the buying of options, either puts or calls, that are as near to the market as possible and to limit risk to a % of the value of the purchase price of the option. So, for example, if I pay $2,500.00 USD for a CLQ24 85 Call, I will limit my loss to 10% of that price should the market go against what I had expected.
The chart setups and scenarios in this study will be based on Renko charts along with various indicators that will be discussed (for the most part individually).
A view of 2024 based on the Renko setup.
I will start with this basic view that has the Renko chart configured as outlined above with two linear regression drawings manually drawn on it. There is an indicator for LR which will follow each block change and change accordingly based on the lookback configuration. With the drawing tool, you can start and end the LR based on your strategy. In mine, I want to base the LR on price from a major low to a major high and then adjust based on if a new high or low is obtained. In this chart, I picked the low as that of late December (the first long black arrow). As an exercise, you can hit the new highs from this point to see how the LR adjusted and how future price flowed within it. There are two LR drawings on this chart; one with an upper and lower deviation set to 2/-2 and the second with a upper and lower deviation set to 1/-1 (these are the ones with dots for a boundary). In this specific chart, I’ve started with the latest high to be that on 01-March and with the LRs both extended to the right, you can see the price movement against these LR into the future. As price broke through the top of the LR recently, a new high was put in on 24-March and the adjustment of the LR will be shown next.
With this new high confirmed, the LRs are both move to end at this high while keeping the original starting point the same. In this view, price pulled back to the top of the LR 1std and close here. With the LR extended, you can see where the mean is and a potential price target if just considering the LR itself.
An expanded view of above:
Next, I’ll introduce the DEMA and simple MA on the chart. There are two DEMAs added to the chart with one set to a period of 12 and one set to a period of 20. The significance of the two is that when the 12 (black on this chart) is above the 20 (red on this chart), then the trend is bullish and when the opposite, the trend is bearish. I use these two more for confirmation than for timing. If you study these, you’ll see that they lag for the most part but there are key times that they will provide insight to the direction of a market during times of consolidation.
The next two indicators that I’ll introduce are the Stochastic and Directional Movement Index (DMI with the ADX). The experience of using these indicators on a Renko chart is like that on a candle chart except that the period is not for time but the number of bars that have been printed or committed. There are two Stochs used (5,3,3 and 25,3,3). The intent of the 5,3,3 is to provide a fast-moving change in momentum while the 25,3,3 is designed to provide insight to the momentum of the longer trend. Insight as to timing the entry and exit of trades may be possible with an in-depth understanding of the crossover of the 25,3,3 between the %k and the %d.
The DMI can be used like it is against a candle chart but with settings at 5,5. This provides a faster moving indicator and, with some study, can determine the importance of the interactions between the 3 lines. There is one key aspect of this indicator with the Renko that works similar to the candle and that is of identifying pending consolidation of the market. In a traditional setup of the DMI on a candle chart, the settings are 14,14 and the line of 20 in the indicator is traditionally the line of strength. Meaning that when the ADX falling at or below the 20 line, then the trends are weak and the market is entering consolidation. During this time, the guidance from various sources is to look for patterns on the market and signs of a breakout. For the Renko charts, the are to watch for trend strength and consolidation is between the 35 and 20 area based on the analysis I’ve done. On the following chart, I’ve highlighted some of these areas of consolidation.
Additionally, there is a notion of a high-swap of the +/-Dis which is when price has started moving strongly in one direction and then pivots to change direction and build into a strong trend from this. While in hindsight these look compelling, they can be difficult to trade in real-time, it’s difficult to differentiate between a high-swap and a future degradation of the trend that leads to consolidation. I think that the more reliable setup is finding the longer points of consolidation and prepare to trade in the breakout direction. As you can see on the close Friday, price has moved off of a new recent high and could now be trending down into a period of consolidation (if one were to use just the combination of the DMI and ADX).
If you’ve not read “Secrets of a Pivot Boss” by Franklin O. Ochoa, I would encourage you to do so as it has many extremely valuable and innovative ideas in trading off volume, value, and pivots. The following discussions will be based on concepts from this book.
The first covered will be that of volume area. I will not dig into the specifics of this but to just show one of the many indicators available in TradingView for these concepts. The volume indicators will work with Renko charts and the specific one I’m using allows me to set the increment of volume based on rows or ticks. I’ve chosen ticks and set the number to 5. With a 25 tick Renko chart, this will allow for a granularity of 5 rows per block for displaying the volume profile. In the chart below, I’ve highlighted a concept outlined in the book of the volume area that is extended out to the next trading day and is what forms the basis for 2-day volume area analysis. There are 6 scenarios that go with this analysis and the pink channels on the chart are intended to enable this view. The volume profile I’ve picked in the indicator is for the week so the analysis I do is for the week and not daily. One of the key setups from the book is an ‘inside day’ which you can see at the black arrow. An inside day is a day to watch for breakout (in this case it would be an inside week) and, after support was found, the price went higher.
The last set of indicators that I’ll cover is the Camarilla Pivots. These too are covered in depth in the book referenced above as well as a wealth of details on the web. These pivots do not work on Renko charts so I will create a candle chart with an 8hr setting and then set up the monthly and yearly pivots on it. From this chart, I’ll copy key lines over to the Renko chart.
This first chart is a view of the 25 tick, 15 minute chart going back to the beginning of 2024. I’ve labeled some of the key lines on this chart for both the year 2024 and the month of March.
This is zoomed into the month of March.
I believe a key concept that makes these pivots on the Renko with the timeframe powerful is the ability to see the tests that happen around the various pivots for both support and resistance. There is an entire trading strategy that is outlined in the book referenced above. The current price action seems to imply that price should come back to either the March R3 or the 2024 R3 (which is also the top of the value area for 2023). If price action does come back to these lines, careful attention should be paid to how support plays out and if a buying or selling opportunity arises from it.
Next, I’ll provide a view with all of the reviewed items in one view.
I’m standing aside on trading this for now until the current price action plays out and a cleaning view of potential trade comes into focus. Some observations considering what’s been discussed individually in this study:
The DEMA is currently swapped to the bearish trend.
The -DI is over the +DI which is a bearish trend. However, The ADX has been dropping to the 35 line but has not dropped in the 35 to 20 range to indicate a consolidation phase.
The Stoch has not completely bottomed out long term and could see more downward movement.
While price is at the top of the 1std of the LR, it could drop further.
A drop and hold of the 2024 R3, March R3, top of the 2023 volume area, and the median of the current LR (all would be within proximity of each other) could be a strong buy setup. A break below these lines with an ensuing test from the bottom could be a strong sell setup.
The relationship of the past two weeks’ volume area is bullish.
A Renko Trading Strategy - A Look at a ChartThis is a current view of CL and some details on the consolidation that is showing up on the 50 and 25 tick charts. February resistance levels are getting tested again. The 10-tick short-term chart has shown some strength but now showing divergence as price hits the larger blocks resistance levels.
10-tick chart
25-tick chart
50-tick chart
A Renko Trading Strategy - Part 7Part 7: Some Examples of Analysis with Indicators
First, let’s look at some of the key indicators that are included in the charts. Regardless of the brick size (10,25, or 50), all charts will have the same configuration.
DEMA (12-period and 20-period) : These moving averages are designed to react more quickly to price changes than a traditional simple moving average (SMA). The 12-period DEMA is black, and the 20-period DEMA is red. We would look for the 12-period DEMA to cross above the 20-period as a potential bullish signal and below as a bearish signal. As you examine the charts going forward, pay close attention to these two when comparing them to the dynamics of the brick patterns.
SMA (20-period) with Blue Dots : This moving average is plotted with blue dots and provides a visual indication of the longer-term trend. It's smoother and slower to react to price changes compared to the DEMA.
WMA (9-period) on the 20-period SMA (Purple Line) : The WMA is used to confirm trends and reversals. When the WMA is above the SMA, it may indicate an uptrend, and vice versa for a downtrend.
In terms of support and resistance, Renko bricks make it easier to spot these levels as they smooth out minor price fluctuations. Support and resistance would be identified by areas where the price has repeatedly reversed direction.
When comparing the 12 and 20-period DEMA to the Renko bricks, look for areas where the DEMAs act as dynamic support or resistance to the price action indicated by the bricks. Similarly, the 20-period SMA and the 9-period WMA would be assessed for their interaction with the Renko bricks.
For breakout patterns, we would look for a consolidation of Renko bricks, indicated by a tight clustering of bricks without clear direction, followed by a breakout above or below this consolidation with a corresponding move in the moving averages.
Let’s identify any notable patterns or signals on the chart. We will look for:
Crossovers between the DEMAs
The relationship between the DEMAs and the Renko bricks
Potential support and resistance levels
Any consolidation patterns that might indicate breakout points
The Average Directional Index (ADX) is used to determine the strength of a trend. The value of 35 that is used is higher than the standard 20 or 25, which implies the reduced noise in Renko charts.
Here’s how you might interpret the ADX in conjunction with the DI lines:
Consolidation : If the ADX is dropping and has crossed below the 35 level, it may indicate that the trend strength is weakening, suggesting a period of consolidation or range-bound market.
ADX Below DI Lines : When the ADX drops below both the +DI (positive directional indicator) and -DI (negative directional indicator), it further suggests that neither buyers nor sellers are in control, reinforcing the consolidation signal.
Watching for a Trend Change : If after dropping, the ADX starts to turn upward while below the DI lines, it could be an early sign that a new trend is starting to form. The direction of the trend would be indicated by which DI line the ADX crosses. If it crosses the +DI, it may signal the start of an uptrend; if it crosses the -DI, a downtrend might be beginning.
To apply this to your Renko chart, you would look for periods where the ADX dips below 35 and pay attention to its direction relative to the DI lines. You'd also consider the brick color change on the Renko chart for confirmation of trend direction if the ADX starts to rise after the dip.
Keep in mind that technical indicators should not be used in isolation; they are more effective when used in conjunction with other analysis tools and techniques. Renko charts themselves filter out smaller price movements, so the ADX on a Renko chart might not react the same way as it would on a traditional candlestick chart.
Here's some ideas on how to analyze and correlate the given indicators to price action:
Renko Bricks : Renko charts focus on price changes that meet a minimum amount and filter out minor price movements, thus highlighting the trend over time. A 50-tick Renko chart will only print a new brick when the price moves by 50 ticks, thereby smoothing out minor fluctuations and making trends easier to spot. The 1-hour timeframe means that each brick represents an hour's worth of price movement.
Linear Regression Channel (1st and 2nd degree) : This tool is used to identify potential support and resistance levels and the overall trend direction. The 1st degree (linear) regression trendlines show the mean price movement, while the 2nd degree could show a parabolic trend which accounts for acceleration in price movement. The price often oscillates around the mean trendline, and deviations can be used to identify overbought or oversold conditions.
Double Exponential Moving Average (DEMA) 12 and 20 : The DEMA is a faster-moving average that reduces lag time compared to traditional moving averages. In your setup, the DEMA 12 would be more reactive to price changes, potentially serving as a short-term trend indicator, while the DEMA 20 could be used to confirm medium-term trends.
Simple Moving Average (SMA) 20 with 9 period Weighted Moving Average (WMA) : The SMA 20 is a common indicator for medium-term trend direction. When combined with the 9-period WMA, which gives more weight to recent prices, you could use crossovers between the two as potential buy/sell signals.
Stochastic Oscillators (5,3,3 and 50,3,3) : Stochastic oscillators compare the closing price of a commodity to its price range over a certain period. The 5,3,3 stochastic is a fast indicator that can signal short-term overbought or oversold conditions. The 50,3,3 stochastic, being much slower, could be used to assess the longer-term momentum of the market.
Average Directional Index (ADX) with the Directional Movement Index (DMI) : The ADX is used to measure the strength of a trend, whether up or down. The DMI includes both the Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI), which help determine the trend direction. A rising ADX indicates a strong trend, while a falling ADX suggests a weakening trend.
When analyzing the chart, consider the following correlations and insights:
Renko and Regression Channel : Look for periods when the Renko bricks consistently stay on one side of the mean regression line. This could indicate a strong trend. If the price breaks through the regression channel, it might signal a potential reversal or a breakout.
DEMA, SMA, and WMA : Watch for crossovers between these moving averages. A crossover of the DEMA 12 above the SMA 20 and WMA might indicate a bullish short-term momentum, while a crossover below could signal bearish momentum.
Stochastic Oscillators : Look for divergence between the price and the stochastic oscillators. If the price makes new highs/lows but the stochastic does not confirm (known as a divergence), it could indicate a weakening trend.
ADX and DMI : If the ADX is rising and the +DI is above the -DI, the uptrend is strong; if the -DI is above the +DI, the downtrend is strong. If the ADX is falling, the trend is considered weak or the market may be ranging.
For trade setups, you might consider the following:
Long Entry : A new Renko brick in the direction of the trend, a bullish crossover in moving averages, the stochastic coming out of oversold territory, and a rising ADX with +DI above -DI.
Short Entry : A new Renko brick opposite the trend direction, a bearish crossover in moving averages, the stochastic coming out of overbought territory, and a rising ADX with -DI above +DI.
It's crucial to back test these indicators and their correlations with historical price data to validate their predictive power. Additionally, always manage risk appropriately, as indicators are not foolproof and should be used in conjunction with other forms of analysis and sound trading principles.
Part 8: Working Through Some Examples
to-follow
A Renko Trading Strategy - Part 6Part 6: How to Incorporate a Stop/Loss Strategy
Incorporating stop-loss strategies into trading using Renko charts and options involves careful consideration of market dynamics, the specific characteristics of options trading, and the unique aspects of Renko charts. Here are some approaches tailored to this trading strategy:
1. Setting Stop Losses Based on Renko Chart Reversal
Renko Brick Reversals : Since Renko charts are designed to filter out minor price movements, a reversal (change in brick color) can be a significant indicator. For options trading, consider setting a stop-loss order if there's a reversal that contradicts your position. For instance, if trading calls based on an uptrend indicated by Renko charts, a stop-loss could be triggered by the appearance of a certain number (e.g., two or three) of consecutive red bricks, signaling a potential downtrend.
Percentage of Option Value : Determine a percentage loss of the option's value that you're willing to tolerate (e.g., 30-50% of the premium paid). This approach requires monitoring the option's value relative to market movements and Renko chart signals.
2. Volatility-Based Stop Losses
Average True Range (ATR) Adjustments : Although traditional Renko charts do not incorporate time or volume, you can use an additional indicator like the Average True Range (ATR) of the underlying futures contract to set volatility-adjusted stop losses. This method involves setting a stop loss at a point where the option's underlying asset moves against your position by an amount that is significant based on recent volatility, indicating the trend might not be as strong as anticipated.
3. Time-Based Exits
Option Time Decay : For options, time decay (theta) is an important consideration. You might set a time-based stop-loss strategy where positions are evaluated for potential exit if there hasn't been favorable movement within a certain timeframe, considering the decay's impact on your option's value, especially as it approaches expiration.
4. Technical and Fundamental Stop Losses
Renko Chart Patterns : If your Renko charts show pattern breakouts or breakdowns (e.g., failure of a breakout pattern you traded on), use these as a basis for stop-loss orders.
Fundamental News: For commodities like crude oil, fundamental news (e.g., geopolitical events, supply changes) can dramatically impact prices. If such events occur and are likely to adversely affect your position, consider them as triggers for your stop-loss strategy.
5. Dynamic Stop Losses
Adjust According to Market Conditions: As market conditions change, regularly review and adjust your stop-loss levels. This dynamic approach ensures that your strategy remains aligned with the current market environment and Renko chart developments.
6. Mental Stop Losses
Disciplined Execution : While physical stop-loss orders placed with a broker are automatic, mental stop losses rely on the trader's discipline to execute a trade when certain conditions are met. This approach allows for flexibility in response to market conditions but requires strict adherence to predetermined exit criteria to be effective.
Conclusion
Creating stop-loss strategies for options trading based on Renko charts involves a blend of technical analysis, understanding of options' characteristics, and disciplined risk management. By combining Renko chart reversals, volatility adjustments, time-based considerations, and both technical and fundamental factors, traders can develop a comprehensive stop-loss strategy that protects against undue losses while allowing room for the natural ebb and flow of the markets. Regular review and adjustment of these strategies in response to market changes are crucial for maintaining their effectiveness.
Part 7: Some Examples of Analysis
to-follow
A Renko Trading Strategy - Part 5Part 5: Devising a Strategy Based on Buying Calls/Puts
When trading crude oil (CL) using options like puts or calls, the strategy involving Renko charts and pattern recognition can be finely tuned for option trading. The choice between puts and calls will depend on the identified trend and pattern signals across the three brick sizes. Here are scenarios that illustrate when to buy puts or calls based on the described strategy:
Scenario 1: Buying Calls
Signal : All three Renko charts (short-term, medium-term, long-term) show a clear uptrend with consecutive green bricks. The medium-term chart breaks out of a consolidation pattern upwards, and the short-term chart shows a reversal pattern from a minor pullback, indicating a continuation of the uptrend.
Action : Buy calls as the uptrend signals an expectation of higher prices ahead.
Example : If the long-term chart has been in a consistent uptrend, the medium-term chart shows a breakout, and the short-term chart indicates a reversal or continuation pattern, it suggests strong bullish momentum, making it an optimal time to buy calls.
Scenario 2: Buying Puts
Signal : All three charts indicate a downtrend with consecutive red bricks. A double top pattern appears on the short-term chart, suggesting a reversal from a minor rally within the downtrend. The medium-term chart starts trending downwards after a consolidation, aligning with the long-term downtrend.
Action : Buy puts as the combined signals suggest a continuation of the downtrend.
Example : After a brief rally indicated by a double top on the short-term chart, if both the medium and long-term charts reinforce a bearish outlook with consistent red bricks, it's an indication to buy puts, expecting the price to fall.
Scenario 3: Buying Calls on a Reversal
Signal : The long-term chart shows a downtrend, but the medium and short-term charts indicate a reversal pattern (e.g., an inverse head and shoulders or a double bottom). The medium-term chart starts showing green bricks, suggesting the beginning of an uptrend.
Action : Buy calls to capitalize on the early stages of a potential reversal and uptrend.
Example : Even if the long-term trend is down, a clear reversal pattern on the short and medium-term charts that aligns with an emerging uptrend suggests a shifting momentum, making it a strategic point to buy calls.
Scenario 4: Buying Puts on a Failing Rally
Signal : During an uptrend on the long-term chart, both the medium and short-term charts show a rally running out of steam, evidenced by a pattern of consolidation followed by a breakout to the downside on the medium-term chart, and a double top on the short-term chart.
Action : Buy puts as the failing rally suggests a potential short-term downtrend, even within a larger uptrend.
Example : If the long-term trend remains bullish but short-term indicators suggest a temporary reversal, buying puts can be a strategic move to profit from the expected downturn.
General Approach for Options Trading with Renko Charts:
Timing : Use short-term and medium-term charts for timing your entry into options trades. The short-term chart provides early signals, while the medium-term chart offers confirmation.
Direction : The long-term chart sets the overall direction for the trade. Even in a bullish long-term trend, short-term downtrends provide opportunities to buy puts, and vice versa.
Volatility : Consider the implied volatility of options before entering a trade. High volatility can increase option premiums, affecting the risk-reward ratio.
Expiration : Choose expiration dates that give the trade enough time to work out. Longer expirations for calls in an uptrend or puts in a downtrend can be beneficial, allowing the market trend to fully develop.
By aligning option buying strategies with Renko chart signals across different time frames, traders can enhance their ability to enter and exit trades with a higher probability of success, leveraging the clarity provided by Renko charts to navigate the volatility of the crude oil market.
When buying puts or calls for Crude Oil (CL) futures with an approach akin to trading futures contracts but aiming to mitigate risk, particularly concerning options' time decay and other unique characteristics, a strategic approach is crucial. There are several key strategies to consider:
1. Choose the Right Expiration
Time Horizon of Your Analysis: Align the expiration of the options with the time horizon of your market analysis. If your analysis based on Renko charts suggests a trend or reversal might play out over several weeks or months, consider options that expire at least 1-3 months beyond your anticipated trend reversal or continuation point. This buffer accommodates the time needed for the market to move in your favor while accounting for time decay.
Avoid Short-Term Expiries: Short-term options are more susceptible to time decay (theta). While they may be cheaper and offer higher leverage, they also require the market to move quickly in your favor. Given the nature of Renko charts to filter out minor fluctuations and focus on more significant trends, a medium to longer-term option is generally more aligned with this strategy.
2. Consider Implied Volatility (IV)
High IV: When IV is high, options premiums are more expensive, reflecting greater expected volatility. Buying options in high IV environments can be risky as you're paying a premium for the expected volatility. However, if your analysis strongly suggests a significant market move, this could still be profitable.
Low IV: Buying options when IV is low can be advantageous because the premiums will be cheaper, reducing the cost of entry. If the market moves in your favor and volatility increases, the value of your option could rise both due to the directional move and the increase in IV.
3. Delta and In-The-Money (ITM) Options
Delta : Consider the delta of the options. Delta close to 1 (for calls) or -1 (for puts) means the option price moves nearly in lockstep with the underlying asset, similar to owning the futures contract but with limited risk. Options with higher deltas are typically more expensive but less affected by time decay relative to their intrinsic value.
ITM Options: Buying ITM options can be a strategic choice for mimicking futures trading. ITM options have intrinsic value and behave more like the underlying asset, with a higher delta and less sensitivity to time decay (theta) compared to out-of-the-money (OTM) options.
4. Rolling Options
Strategy : To maintain a position in the market while managing time decay, consider rolling options. As the expiration date approaches and if your market outlook remains unchanged, you can sell the nearing expiration option and buy a further out expiration option. This strategy requires careful consideration of transaction costs and potential slippage but allows you to stay in the trade with a fresh time horizon.
5. Hedging and Risk Management
Diversify Expirations : Instead of buying all options with the same expiration, consider staggering expirations. This diversification can help manage risk if the market moves against your position in the short term.
Adjust Positions: Be prepared to adjust your position based on market movement and upcoming economic events. Use stop-loss orders or consider buying options with different strike prices to hedge your bets.
Conclusion
When treating options on Crude Oil futures like trading the futures themselves but with reduced risk, selecting the right expiration date is vital, taking into account your market outlook, time decay, and implied volatility. Medium to longer-term options with consideration for delta and ITM status can more closely mimic the behavior of trading futures while offering the risk mitigation benefits of options trading. Always incorporate risk management strategies and be prepared to adjust your positions as market conditions evolve.
Part 6: How to Incorporate a Stop/Loss Strategy
to-follow
A Renko Trading Strategy - Part 4Part 4: Incorporating Patterns with Strategy
Incorporating pattern recognition into a trading strategy using three different brick sizes for Renko charts can enhance decision-making by providing multiple perspectives on market momentum and trend reversals. Applying this to the WTI (CL) market, using short-term, medium-term, and long-term views with different brick sizes.
1. Short-term Brick Size (e.g., 10 ticks, 1min)
Entry Signal : Look for breakout patterns or reversal patterns like a double bottom or an inverse head and shoulders pattern. This brick size will be more sensitive to recent price movements, offering early entry points.
Confirmation : Use this chart to get an early indication of a trend change or to catch the beginning of a new trend. However, due to its sensitivity, it's essential to wait for confirmation from the medium-term chart to reduce the risk of false signals.
2. Medium-term Brick Size (e.g., 25 ticks, 1min)
Entry Signal : This chart size is great for confirming trends identified in the short-term chart. If the medium-term chart starts to show a series of green bricks after a reversal pattern in the short-term chart, it's a stronger signal that the trend is reversing.
Strategy : Use this chart to solidify your decision for entry. For example, if you notice a consolidation pattern that breaks out in the same direction as the short-term trend, it can be a good entry point. The medium-term chart helps in filtering out the noise and focusing on more sustainable trends.
3. Long-term Brick Size (e.g., 50 ticks, 1min)
Entry Signal : Long-term charts are excellent for identifying the overall market trend. A clear pattern of consecutive bricks (either uptrend or downtrend) can indicate a strong market direction.
Strategy : Use the long-term chart for setting the direction of your trades. Enter trades that align with the long-term trend for higher probability outcomes. The long-term trend can also serve as a backdrop for assessing the strength of medium-term signals.
Combining Signals for Entry
Confluence Entry: The strongest entry signals will occur when patterns or trends align across all three brick sizes. For example, if the short-term chart shows a reversal pattern, the medium-term chart begins to trend in that direction, and the long-term chart supports this with a consistent trend, it's a strong signal for entry.
Breakout Entry: A breakout from a consolidation pattern (rectangle) on the medium-term chart that is also supported by a long-term trend can be a robust entry signal. The short-term chart can be used to fine-tune the entry point, such as entering after a small pullback following the breakout.
Risk Management
Stop-Loss Orders : Place stop-loss orders based on patterns from the medium or long-term charts to give your trades more room to breathe while still protecting against significant losses.
Take-Profit Points: Set take-profit levels based on significant resistance or support levels identified in the long-term chart to capitalize on the overall market movement.
Example Scenario
Scenario : The long-term chart shows a steady uptrend with consecutive green bricks. The medium-term chart shows a breakout from a consolidation pattern, and the short-term chart shows a double bottom, indicating a potential reversal from a recent minor pullback.
Action : Enter a long position after the double bottom on the short-term chart, with the medium-term breakout providing additional confirmation. The long-term uptrend supports the overall bullish outlook.
Risk Management : Place a stop-loss below the most recent low on the medium-term chart and set a take-profit near a significant resistance level identified on the long-term chart.
Conclusion
By using Renko charts with three different brick sizes and recognizing patterns across these timeframes, traders can develop a nuanced and layered approach to entering the crude oil market. This strategy allows for early detection of trends, confirmation across multiple timescales, and robust risk management, leading to potentially more informed and strategic trading decisions.
Part 5: Devising a Strategy Based on Buying Calls/Puts
to-follow
A Renko Trading Strategy - Part 3Part 3: Patterns in Renko Charts
Renko charts, like other charting methods, have identifiable patterns that traders look for as indicators of potential market movements. These patterns are appreciated for their simplicity and effectiveness in highlighting trends and reversals without the noise of minor price movements. Here are some common patterns observed in Renko charts, applicable across various markets:
1. Trend Patterns
Uptrend/Downtrend: Consecutive bricks of the same color indicate a trend. An uptrend is shown by a series of green (or white) bricks, while a downtrend is depicted by red (or black) bricks. The more consecutive bricks, the stronger the trend.
2. Reversal Patterns
Double Top and Double Bottom: These patterns occur when the price reaches a certain level twice but fails to break through. In Renko charts, a double top is indicated by the bricks failing to move higher after reaching a high point twice, suggesting a potential reversal from an uptrend to a downtrend. Similarly, a double bottom indicates a potential reversal from a downtrend to an uptrend.
Head and Shoulders (and Inverse): This pattern is harder to spot in Renko charts due to their simplified nature but can still be identified. A head and shoulders pattern indicates a reversal from an uptrend to a downtrend, while an inverse head and shoulders suggests a reversal from a downtrend to an uptrend.
3. Consolidation Patterns
Rectangles: These occur when bricks alternate colors within a range, indicating market consolidation or a period of indecision. A breakout from this pattern can indicate the direction of the next significant move.
4. Breakout Patterns
Support and Resistance Breakouts: Renko charts clearly show support (a level where price consistently finds a floor) and resistance (a ceiling where price tends to top out). A breakout occurs when bricks pass through these levels, potentially indicating the start of a new trend.
Strategy Implications
Patterns in Renko charts can be used to devise trading strategies:
Entry Points: Patterns like breakouts from consolidation ranges or reversals can provide clear entry points.
Exit Points: Recognizing the end of a trend pattern or the completion of a reversal pattern can serve as a signal to exit a position to maximize gains or minimize losses.
Stop-Loss Placement: Patterns can help identify significant levels for placing stop-loss orders, such as below a recent bottom in an uptrend or above a recent top in a downtrend.
Advantages and Limitations
The advantage of using Renko charts and identifying these patterns lies in the chart's ability to filter out minor price movements, making it easier to spot meaningful trends and reversals. However, because time and volume are not considered, Renko charts may not always reflect the full picture of market dynamics. Traders often use them in conjunction with other analysis tools to make more informed decisions.
These patterns, while straightforward in theory, require practice to identify effectively and use within a comprehensive trading strategy.
Part 4: Incorporating Patterns with Strategy
to-follow
A Renko Trading Strategy - Part 2Part 2: Devising a Strategy with Renko
Devising a trading strategy using Renko charts with three different brick sizes for the same market, like crude oil, and analyzing them on the same time scale can provide insights into market trends and momentum at various levels. The following is one of many possible approaches:
1. Choose Brick Sizes
Select three different brick sizes that represent short-term, medium-term, and long-term market movements. For example:
Short-term: 10 ticks
Medium-term: 25 ticks
Long-term: 50 ticks
These sizes could be chosen based on the volatility of the market and your trading goals.
2. Set Up Charts Side by Side
Prepare three Renko charts for crude oil, each with one of the chosen brick sizes. Analyzing them side by side or simultaneously will allow you to get insight into how they compare within the same time.
3. Define Your Strategy
A strategy could involve looking for confluence among the charts, where signals on multiple brick sizes align, indicating a stronger trend or reversal. Here’s a potential approach:
Trend Confirmation: A trend appears on the long-term chart (50 ticks), and you look for entries when the medium-term (25 ticks) chart aligns with this trend. The short-term chart (10 ticks) can provide specific entry points that minimize risk, as you're entering on minor pullbacks or consolidations within a larger confirmed trend.
Trend Reversals: If the short-term chart shows a reversal pattern not yet visible on the medium- or long-term charts, it could be an early signal. Confirm this signal if the reversal starts to appear on the medium-term chart, suggesting a more significant shift in market sentiment.
Divergence: If the short-term chart diverges from the medium- and long-term trends, it might indicate a potential reversal or a weakening trend. Use this information cautiously to either take profits from existing positions or prepare for a trend change.
4. Implement Risk Management
Regardless of the signals, always have a clear risk management strategy. Decide on stop-loss levels and take-profit points based on the chart that you're using for entry signals. For example, if you're entering based on the short-term chart, you might set tighter stop-loss levels than if you're entering based on medium-term signals.
5. Continuous Monitoring and Adjustment
The effectiveness of this strategy can vary over time due to changes in market volatility and conditions. Regularly review and adjust the brick sizes and strategy parameters as needed to align with the current market environment.
6. Example Strategy Execution
Entry: Enter a trade when all three charts show a clear trend in the same direction. For example, if all charts show an uptrend, consider taking a long position.
Exit: Consider exiting or taking profit if the short-term chart shows a significant reversal pattern, even if the medium- and long-term charts still indicate an uptrend. This could preempt a broader market reversal.
Conclusion
This multi-scale Renko chart strategy allows for a nuanced view of market dynamics, combining the clarity of trend confirmation with the sensitivity to early reversal signals. By integrating signals from different time perspectives, you can make more informed decisions and potentially improve the risk-reward ratio of your trades.
Part 3: Patterns in Renko Charts
to-follow
A Renko Trading StrategyPart 1: A Brief Overview
In traditional Renko charts, time does not play a role in when a new brick is printed; bricks are purely based on price movement reaching a specified threshold. However, some variations and adaptations of Renko charts integrate time or other criteria to align more closely with certain trading strategies or preferences.
Tradingview combines elements of time-based filtering with the price movement criteria of standard Renko charts. By allowing someone to set not only the size of the brick (representing the minimum price movement required to print a new brick) but also the length of time the price must remain beyond this threshold to validate the brick, this approach introduces a hybrid element to the construction of Renko charts.
This modification can help to filter out even more noise by ensuring that only price movements that are sustained for the specified period contribute to the formation of the chart. It could be particularly useful for traders looking to avoid false signals that might result from brief, sharp price movements that don't represent a true change in market sentiment.
Incorporating time into Renko charts can make them somewhat more similar to traditional time-based charting methods, providing a hybrid that retains the noise-filtering benefits of Renko while adding an extra layer of confirmation to the price moves. This can be a valuable tool for traders who wish to fine-tune their analysis by considering both significant price changes and the persistence of these changes over time.
The size of the brick in Renko charts directly influences the chart's sensitivity to price changes, and as a consequence, it indirectly affects its sensitivity to time as well, although time is not explicitly considered in traditional Renko chart construction.
A larger brick size makes the chart less sensitive to price movements. This is because a larger price change is required to add a new brick to the chart, which can lead to fewer bricks being printed over a given period. This reduction in sensitivity means that minor price fluctuations are effectively filtered out, highlighting more significant trends. Consequently, when you use a larger brick size, the chart might appear similar across different time frames because only substantial price movements are recorded, and these are less frequent.
With WTI s an example, setting the brick size to 25 ticks filters out all price movements that are smaller than this. Whether you're looking at a 1-minute or an 11-minute timeframe, the chart will only update when the price moves by 25 ticks or more from the last brick. If the market is relatively stable or if price changes are within this 25-tick range, the Renko chart will remain unchanged, making the chart appear similar across these different time observations.
This characteristic of Renko charts makes them particularly useful for identifying and trading based on longer-term trends, as it diminishes the impact of short-term volatility and noise. The choice of brick size is a fundamental decision for traders using Renko charts, as it needs to balance the desire to filter out insignificant price movements with the need to capture meaningful market moves timely.
Part 2: Devising a Strategy with Renko
to follow
Short Dated Options to Deftly Manage Oil Market Shocks"Volatility gets you in the gut. When prices are jumping around, you feel different from when they are stable" quipped Peter L Bernstein, an American financial historian, investor, economist, and an educator.
Crude oil prices are influenced by a variety of macro drivers. Oil market shocks are not rare events. They appear to recur at a tight frequency. From negative prices to sharp spikes in volatility, crude oil market participants "enjoy" daily free roller-coaster rides.
Precisely for this reason, crude oil derivatives are among the most liquid and sophisticated markets globally. This paper delves specifically into weekly CME Crude Oil Weekly Options and is set out in three parts.
First, what’s unique about short-dated options? Second, tools enabling investors to better navigate crude oil market dynamics. Third, a case study illustrating the usage of weekly crude oil options.
PART 1: WHAT’S UNIQUE ABOUT CME CRUDE OIL WEEKLY OPTIONS?
Macro announcements such as US CPI, China CPI, Fed rate decisions, Oil inventory changes and OPEC meetings drive oil price volatility.
Sharp price movements can lead to premature stop-loss triggers. When prices gap up or gap down at open, stop orders perform poorly leading to substantial margin calls.
Weekly options enable hedging against these risks with limited downside and substantial upside.
Closer to expiration, options prices are sensitive to changes in the prices of the underlying. Small underlying price moves can have outsized value creation through short-dated options.
Hedging with weekly options allows investors to enjoy large upside potential. Short duration vastly reduces the options premium burden. This high risk-reward ratio has made short-dated options popular among both buyers and sellers.
The daily traded notional value of Zero-DTE options (Zero Days-To-Expiry, 0DTE) have grown to USD 1 Trillion. Among S&P 500 options, 0DTE options comprise 53% of the average daily volume (ADV), up from 19% a year ago.
In 2020, CME launched Weekly WTI options with Friday expiry (LO1-5), offering robust, round-the-clock liquidity and enabling precise event exposure management at minimal cost.
These weekly options are now the fastest growing energy products at CME with ADV growing 69% YoY with June 2023 ADV up 136% YoY.
Building on rising demand, CME added weekly options expiring Monday and Wednesday. At any time, the four nearest weeks of each option are available for trading.
Weekly options settle to the latest benchmark CL contract and like other CME WTI products, they are physically deliverable ensuring price integrity.
Each weekly WTI options contract provides exposure to 1,000 barrels. Every USD 0.01 change per barrel change in WTI represents a P&L change of USD 10 in premium per contract.
PART 2: EIGHT TOOLS TO BETTER NAVIGATE CRUDE OIL MARKET DYNAMICS
Highlighted below are eight critical tools across TradingView and CME enabling investors to better navigate oil market dynamics.
1. OPEC+ Watch
OPEC+ Watch charts the probability of different outcomes from OPEC+ meetings. Probabilities are derived from actual market data & represent a condensed consensus market view of forthcoming meetings.
2. News Flow
TradingView’s News section collates the key market developments impacting crude oil.
3. Forward Curve
TradingView maps crude oil prices across the forward curve exhibiting oil’s term structure.
Augmenting the forward curve chart is a table CL contracts across various expiries with technical signals embedded in them enabling investors to spot calendar spread trading opportunities.
4. TradingView Scripts
Supported by a vibrant community of script creators, TradingView has curated scripts catering to the specific needs of crude oil traders.
OIL WTI/Brent Spread by MarcoValente: Shows the spread between WTI and Brent crude. This spread is growing in importance with growth in US oil exports.
Seasonality Indicator by tradeforopp: Presents seasonal price trends along with key pivot points to guide traders.
5. Economic Calendars
TradingView’s economic calendar highlights upcoming economic events segmented by dates and with countdown timers to help traders better manage their portfolios.
Augmenting, TradingView’s calendar is CME’s Economic Events Analyzer which lists key events specifically impacting energy markets and highlights the relevant weekly options contract.
6. Options Expiration Calendar
CME’s Options Expiration Calendar is a comprehensive yet condensed view of upcoming expiration dates of WTI options, even those that are not listed yet.
7. Daily/Weekly Options Report
CME’s Daily/Weekly Options Report profiles volumes and OI by strike price for weekly options supplying key stats such as Put/Call ratio and key strike levels at a glance.
8. Strategy Simulator
CME’s strategy simulator allows investors to simulate diverse options strategies. Selecting the relevant instruments and adding each component of the overall position automatically calculates the payoff while still allowing modification of key statistics such as volatility based on user inputs.
The below shows the payoff of an ATM straddle position for the upcoming Monday weekly option.
It also allows simulating various market conditions. Selecting price trends such as up fast, up slow, flat, down slow, down fast can simulate the changes in P&L.
PART 3: ILLUSTRATING USAGE OF WEEKLY CRUDE OIL OPTIONS
Why does CME list weekly options expiring on Monday, Wednesday, and Friday?
Each of these address specific macro events. OPEC meeting outcomes are typically announced over the weekend leading to gaps in prices on Monday. EIA weekly crude oil inventory data are released on Wednesdays. Key US economic data such as CPI and Non-farm payrolls are released on Fridays.
Use Case for Options expiring on Monday
These can be used to hedge against downside risk associated with weekend events.
For instance, in April, OPEC+ announced major supply cuts at their meeting on Sunday. This led to WTI price spiking 4% at market open.
This can lead to “gap risk.” Gap risk refers to the risk that markets may open sharply above or below their previous close. Since, price never passes the levels in between, stop loss orders fail to trigger at set levels resulting in more-than-anticipated realised losses.
Such gap risks from weekend news can be managed through Monday weekly options which provides a predictable and resilient payoff with limited downside risk.
Use Case for Options expiring on Wednesday
Oil inventory reports by EIA (U.S. Energy Information Administration) and API (American Petroleum Institute) are released every week on Tuesday and Wednesday respectively. Major misses/beats against expectations for these releases can result in large price moves.
Wednesday options come in handy to better manage volatility stemming from these shocks or surprises.
Weekly options provide superior ROI on small moves when compared to futures. Favourable price moves deliver larger payoffs from position in weekly options than futures and shorter expiries allow for much lower premium than monthly options.
Illustrating with Back tested Results
On June 14th, Crude price fell by 1.7% (USD 1.2) to USD 68.7/barrel upon release of inventory data that showed a larger than expected inventory build-up.
In the lead up to this data release, a crude oil participant could either (a) Short Crude Oil Futures, or (b) Long Weekly Crude Oil Put Option.
Summary outcomes from these two strategies are tabulated and charted below. The results speak for themselves. Short dated long put option is capital efficient, prudent, and credible as a risk management tool. That said, participants must evaluate the risk return profile taking into consideration market liquidity and volatility levels, among others, when choosing between instruments.
KEY TAKEAWAYS
In summary,
1) Weekly Options can be cleverly deployed to hedge against shocks in oil markets.
2) TradingView & CME provide a rich suite of tools to deftly navigate the oil market dynamics.
3) Weekly options expiring on (a) Monday helps manoeuvre developments over the weekend, (b) Wednesday helps to manage inventory data linked shocks, and (c) Friday enables investors to trade and hedge around key US economic data.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Exploring Seasonality in Crude Oil PricesWhat rises, must fall. What comes down, goes up again. This rings most true for crude oil prices. Both secular and seasonal trends are at play in crude oil prices.
Demand for oil moves in tandem with global economic activities. Key secular trends impacting oil markets over this decade was covered in our previous paper . These range from falling demand from developed markets, and rising demand in emerging economies, among others.
While secular trends unravel over a longer time, seasonal cyclical effects can be observed over a short term.
This paper will explore consumption patterns driving annual seasonality in crude oil prices. In Part two of this paper, we will illustrate trading crude oil derivatives to harness opportunities arising from seasonality.
CRUDE OIL SUPPLY CHAIN: AN OVERVIEW
Gluts and shortages, economic growth and contractions, and geopolitics impact crude oil prices. Different events impact various segments of the supply chain. The global crude oil supply chain is complex and intricate. It can broadly be classified into Upstream, Midstream, and Downstream.
Upstream and midstream sectors drive crude oil supply. Upstream outage or shortage affects available supply which are sometimes evened out by the midstream through adequate inventories.
Downstream and midstream drives demand. End consumer demand is observed in distribution. Refineries adjust output based on their margins which in turn is derived from crude oil prices and refined product prices.
WHAT DRIVES SEASONALITY?
Seasonality in demand for refined products impact crude oil prices. Higher demand for refined products (gasoline, diesel, and kerosene) is observed in summer because of travel. While lower supply is caused by maintenance linked pauses in downstream during winter.
Crude oil inventory shifts can be segmented into four phases, namely: (1) Inventory Build Up (Feb - May), (2) Summer Travel Spikes Demand (Jun - Aug), (3) Demand Shrinks & Supply Contracts (Sep - Nov), and (4) Winter led demand spike (Dec - Jan).
This seasonality is evident in US crude oil inventory shifts as exhibited below.
Impact of seasonality is not always directly apparent or predictable. Why? Crude oil is so deeply intertwined with global economics. Shocks, if any, can have an outsized impact on prices and volatility. Also, supply cuts from majors oil producers and GDP shifts in major consumers have jumbo effect on prices. Consequently, other factors moderate or nullify impact of seasonality.
The below chart shows the average price behaviour of Crude oil from the start of each year over the past twenty (20) years by using CME front month crude oil futures price data from TradingView.
Orange bars in the above chart represents average monthly price change measured over last twenty years. Meanwhile, the white bar shows monthly price change for the same period but after excluding the outliers. Outlier years include 2008 (global financial-crisis), 2020 (pandemic), and 2022 (Russia-Ukraine conflict).
Crude prices go bullish on higher demand by refineries starting in March and continue to rise through the summer months as demand for refined products remains high driven chiefly by increased travel.
However, by August, sufficient refined product inventories dampen demand. With refineries slowing for maintenance, crude demand declines leading to a moderation in price. Finally, a small uptick is observed in December as demand starts to rise again during peak winter.
The average monthly returns for each month are displayed below. However, note that the standard deviation for these averages is non-trivial indicating that month-of-the-year effect on crude oil prices is uncertain and, in many cases, statistically insignificant. This conclusion is also arrived at based on various academic research papers.
METHODS TO HARNESS CRUDE OIL SEASONALITY
Three most common methods to harness gains from seasonality include: a. Futures (highest upside and highest downside), b. Call options (upside limited relative to futures and limited downside risk), and c. Call and/or Put Spreads (limited upside and limited downside).
Traders can deploy options to express a directional view with unlimited upside and limited downside. In a long options position, the downside is limited to the premium paid.
Conversely, a short position in options involves selling an option. This offers upside limited to the premium collected but exposed to unlimited downside.
TRADE SET UP ILLUSTRATIONS
From July until November, based on historical observations over the last twenty years, crude oil prices tend to fall. We could set up a trade using the December contract month of CME Micro Crude Oil Futures which expires on Nov 17th:
1. Short Futures: Short Futures position in MCL Dec 2023 contract (MCLZ3) at USD 70 per barrel with the anticipation that prices will fall by November.
2. Long Puts: Long Put options on MCLZ3 at a strike of USD 69 per barrel with a hypothetical options premium of USD 3 per barrel.
3. Bear Call Spread: Bear Call Spread with a net premium of USD 1 per barrel on MCLZ3 comprising of a short call option at a strike of USD 71 a barrel (collecting options premium of USD 5 per barrel) and a long call option at a strike of USD 73 a barrel (paying options premium of USD 4 per barrel).
The Bear Call Spread profits a fixed amount equal to the net premium when both options expire out of the money. When only the short call options expires in the money, the position loses by having to pay the options buyer. However, when both options expire in the money the profit from the long option partially offsets this loss resulting in a capped downside.
Each CME Micro Crude Oil Futures contract represents one hundred barrels of crude oil. Accordingly, the above three trade set ups are illustrated across various price scenarios as shown below.
Please note that these illustrations do not include (a) transaction costs comprising of exchange trading and clearing costs and brokerage fees, and (b) capital costs associated with margins required for establishing these positions.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Target reached! Crude Oil ReviewPrice bounced strongly above the 67.31 support level towards our take profit target - but how did we do it?
Join Desmond in this analysis review where he covers the reason why this setup worked nicely.
Please be advised that the information presented on TradingView is provided to FXCM (‘Company’, ‘we’) by a third-party provider (‘Name of third party provider). Please be reminded that you are solely responsible for the trading decisions on your account. There is a very high degree of risk involved in trading. Any information and/or content is intended entirely for research, educational and informational purposes only and does not constitute investment or consultation advice or investment strategy. The information is not tailored to the investment needs of any specific person and therefore does not involve a consideration of any of the investment objectives, financial situation or needs of any viewer that may receive it. Kindly also note that past performance is not a reliable indicator of future results. Actual results may differ materially from those anticipated in forward-looking or past performance statements. We assume no liability as to the accuracy or completeness of any of the information and/or content provided herein and the Company cannot be held responsible for any omission, mistake nor for any loss or damage including without limitation to any loss of profit which may arise from reliance on any information supplied by Name of third party provider.
The speaker(s) is neither an employee, agent nor representative of FXCM and is therefore acting independently. The opinions given are their own, constitute general market commentary, and do not constitute the opinion or advice of FXCM or any form of personal or investment advice. FXCM neither endorses nor guarantees offerings of third party speakers, nor is FXCM responsible for the content, veracity or opinions of third-party speakers, presenters or participants.
High Risk Investment Warning
Trading Forex/CFDs on margin carries a high level of risk and may not be suitable for all investors. Leverage can work against you.
Forex Capital Markets Limited (www.fxcm.com):
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
FXCM EU LTD (www.fxcm.com):
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
FXCM Australia Pty. Limited (www.fxcm.com): **
Trading FX/CFDs carries significant risks. FXCM AU (AFSL 309763), please read the Financial Services Guide, Product Disclosure Statement, Target Market Determination and Terms of Business at www.fxcm.com
FXCM Markets LLC (www.fxcm.com):
Losses can exceed deposits.
Leading Indicators To Improve Decision Making in Oil TradingHello Traders!
As you know, trading is a game of probabilities and navigating the financial markets is not always easy.
Different strategies that we use, such as Elliott wave analysis and pattern trading, can provide different scenarios for market movements.
However, market conditions are often uncertain and can extend beyond what is predicted by these strategies. In such cases, it is useful to have access to scientifically proven tools that can help us better assess the probabilities of different scenarios. One such tool is the use of leading indicators.
In this educational idea, we will explore the use of a leading indicator for Wti prices that embodies information from futures term spread and Relative Inventories.
Correlation with Relative Inventories is due to the basic supply and demand dynamics of the market. When inventories are high, there is an oversupply of oil which puts downward pressure on prices. Conversely, when inventories are low, there is a shortage of oil which puts upward pressure on prices.
Another useful metric for predicting oil prices is the term spread. The term spread refers to the difference between the prices of two oil contracts with different delivery dates. Researchers have found that changes in the term spread can be a leading indicator of future prices. The relationship between the term spread and oil prices comes from the fact that the term spread reflects changes in market expectations about future supply and demand for oil.
Studies have confirmed the predictive power of both relative inventories and the term spread. Starting in a seminar paper by Hamilton (1983), it was demonstrated that changes in inventories had a significant impact on future oil prices. Similarly, other research has shown that changes in the term spread have a strong correlation with future oil price movements (e.g., Kilian and Murphy, 2009), and now there are a vastity of academic paper that explores that correlations and the predictive possibilities.
Here another couple of references:
www.sciencedirect.com
gupea.ub.gu.se
Now, I want to bring you an example of how these empirical result can be exploited and used in trading.
In the main chart indeed I show an indicator constructed to reproduce the forecasting model proposed in the last article that I linked (Larsson, 2018).
This Forecasting Model is a time series ARIMA model that uses both relative inventories and term spread between 3-months ahead contract and the 40-months ahead contract, together with squared relative inventories to capture non linearities in the relation between inventories and wti price.
You can see the forecasted model in the red line, while the blue line is the weekly oil closing price.
I will report again here the chart for clarity:
After the uptrend ended, in which the forecasting model overshooted before crossing back, we can see that every time the red line (forecasting model) retested the blue line (actual price) the retest was followed by a strong decrease in price.
This was use for us as confirmation for our bearish scenario on oil, that we are still trading.
I hope you can find this post useful!
If you have any comment, please share, we will be happy!
Cheers, GMR
Why Crude Oil is Trending Higher Again, Breaking Above US$100In this tutorial, I will explain both its fundamental and technical reasons for crude oil likely to break above and stay above US$100.
I am having two portfolios at all times, one for long-term investing and the other for short-term trading.
For the long-term I am mindful the current global inflationary pressure is real and it may last many months or even years ahead.
Therefore, my current investment mandate:
• U.S. stock markets – To trade them
• Commodities – To buy them
Disclaimer:
• What presented here is not a recommendation, please consult your licensed broker.
• Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises.
For your reference:
NYMEX Crude Oil
$0.01 = US$10
Example:
From $94.00 to $100.00
(10000-9400) x US$10 = US$6,000
A good trendline should touch 3 timesJust wanted to highlight for you this morning the importance of trendlines. Good trendlines are like a good wine – the older they are the better they become! A 3-month trendline is more important than a 3-week trendline for example. They also help to enforce discipline; they can act as entry or exit zones and they can help with timing.
This one on the Crude Oil continuation chart is an excellent one, it underpins the bull move so far this year and connects 3 points (very important) and is located circa 106.50. Success or failure at the trendline is likely to prove pretty directional for the market and given price action over the past week, to my practiced eye – it looks vulnerable. Failure we suspect would initiate a sell-off towards the 50% retracement (of the move seen this year) circa 96.50.
Less Liquidity In Summer Months Could Lead To More VolatilityThe Memorial Day weekend is the start of the summer season. In many markets, seasonal factors can impact prices. The old saying, “sell in May and go away,” may not be applicable in the stock market as stocks have been on a rocky path lower in 2022. In commodities, gasoline, meats, grains, and other raw material prices often increase as demand peaks. Heating oil and other winter commodities often move to the downside. However, 2022 is anything but an ordinary year in markets.
Thin markets are more volatile than liquid markets
Market participants are tired and frustrated in 2022
Lockdowns over the past years could lead to extended summer vacations
Lots of head-fake moves on the horizon
Expect the unexpected- Volatility leads to opportunity
Over the past two years, the global pandemic distorted prices. Stocks rose as artificially low interest rates made the stock market the only alternative with fixed income yields at historical lows. Rates are rising in 2022, with a hawkish Fed and falling bond market. Supply chain bottlenecks continue to plague commodities, and the war in Ukraine has only exacerbated pricing and availability issues. Mid-term elections in the US, and a Presidential contest in Brazil, a leading commodity-producing country, are on the horizon later this year. The geopolitical bifurcation between nuclear powers is another issue facing markets that reflect the economic and geopolitical landscapes.
Market participants are exhausted as 2022 has brought a new set of concerns. We could see liquidity in markets dry up over the coming weeks and months as the summer has arrived, and vacations will limit participation in markets across all asset classes.
Thin markets are more volatile than liquid markets
Liquidity is a critical ingredient for smooth-running markets. Liquidity tends to reduce price variance as more market participants increase buying and selling interests at various levels.
Commodities tend to be more volatile than other assets, sans cryptocurrencies, but some raw material markets experience far more volatility than others. Lumber and crude oil are two highly volatile commodities, but one has minimal liquidity while the other experiences far more participation.
The daily chart of CME lumber futures shows that daily volume tends to be well below 500 contracts. Open interest at 2,293 contracts makes lumber an illiquid market. Daily historical volatility at over 62% is a function of the lack of volume and open interest, leading to price gaps and limit-up and limit-down price moves where buying disappears during bearish periods and selling evaporates when the price moves higher.
Meanwhile, on a typical trading session, NYMEX crude oil futures trade well over 400,000 contracts, with open interest at above 1.81 million contracts on June 2. Daily historical volatility at below 20% reflects that the highly liquid oil market has buyers and sellers at all price levels.
The bid-offer spreads in liquid markets are far tighter than in illiquid markets. As liquidity declines, markets tend to experience far more price variance.
Market participants are tired and frustrated in 2022
In early 2022, market participants were breathing sighs of relief as the global pandemic was beginning to fade in the rearview mirror. Health concerns may have declined, but financial woes increased with prices.
Monetary and fiscal policies planted inflationary seeds that have caused prices to explode higher, while supply chain bottlenecks continue to exacerbate inflationary pressures. Meanwhile, the Russian invasion of Ukraine is another crisis following on the heels of two years of pandemic panic. Sanctions and Russian retaliation exacerbate inflation. Moreover, Russia’s “no-limits” cooperation with China creates a geopolitical bifurcation of the world’s nuclear powers.
We live in interesting and exhausting times, with people tired and frustrated with the events since 2020.
Lockdowns over the past years could lead to extended summer vacations
Lockdowns ended in the US as vaccines went into arms. People have returned to work and school. In China, the COVID-19 restrictions appear to be easing. In early June 2022, the coming summer months offer the opportunity to rest, relax and recharge internal batteries for the second half of 2022. The demand for travel, hotel rooms, and other vacation-related consumer products has soared. Inflation and supply chain bottlenecks have only increased prices, but the demand is robust.
As market participants take a few weeks off over the coming months, they are likely to turn off their screens and ignore the market action that could interfere with good times with friends and family. Increased vacations may bolster earnings for travel-related businesses, but it will reduce market liquidity as a vacation for many includes a rest period from watching or participating in markets across all asset classes.
Lots of head-fake moves on the horizon
As liquidity declines because of a lack of participation, markets will likely become a lot bumpier over the coming weeks and months. Selling could lead to downdrafts and buying may create rip-your-face-off rallies. These events cause head-fake moves that can cause even the most experienced traders and investors more than a bit of indigestion.
A decline in liquidity could dramatically increase price variance. The geopolitical and economic landscapes will not take any vacation during the summer of 2022.
Expect the unexpected- Volatility leads to opportunity
Expecting the unexpected will reduce the stress-related with sudden market volatility. Moreover, higher price variance increases opportunities for nimble traders and investors with their fingers on the pulse of markets.
Approach markets with a sold risk-reward plan that avoids open-ended risks. Even though declining liquidity can cause markets to rise or fall to irrational price levels, always remember the current price is always the correct price because it is the level where buyers and sellers meet in a transparent environment, the marketplace. Do not be afraid to take small losses and remember to take those profits or adjust risk levels to protect them when markets reach targets. Trading or investing with a plan and sticking to it avoids the ego-related mistakes that cause us to believe we are always right, and the market is wrong. The market price is never wrong.
Meanwhile, combinations of put and call options can protect the downside, hedging portfolios while allowing for upside participation that will enable you to enjoy your time off from the daily grind. Enjoy the summer but keep your eyes open for opportunities. Adjust your mindset to expect the unexpected and embrace the higher volatility that comes alongside lower liquidity. Price variance is a nightmare for the passive, but it creates a world of opportunity for the dynamic.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
