Trade Of The Week: US Crude Oil

Every week, I keep an eye on the oil inventory number. Despite my dislike for trading volatile commodities, this release usually impacts oil prices in a pretty standard way. If the change is lower than expected, the price oil goes up, if greater than expected, then oil goes down. The larger the deviation, the larger the change in price. And we saw a whopping deviation this past Wednesday. If you want to learn more on how to trade the oil inventory number, check out the blog I recently wrote on it.

Strategy

Leading up to the inventory number at 15:30, I didn’t have a strong feeling about it. I wasn’t leaning towards a long or a short at all. The past three weeks had seen oil fall on the back of greater than expected builds in inventories, but that wasn’t tempting me to put on a short. To be honest I was thinking that I would passively check out the number, move on and look for another trade.

My mindset was completely altered when I saw the release. A -8.4 million drawdown when a 1.2 million build was expected. That’s an absolute deviation of 9.6 million, the largest difference since I started tracking the oil inventories in January 2007. Demand had obviously picked up for ‘Texas tea’. In a state of shock, I missed the initial 120 point jump in US Crude Oil. As always, there was a retracement from the initial spike. The retracement was about 50%. This was my chance to get in. Waiting to see if the fall has definitely stopped, I didn’t get in until about 15:55. I went €10 a point long US Crude Oil at 72.24.

Where To Put Stop And Limit Levels

With no preconceived notions about where I was going to place my stop and limit orders, I had to think quickly. The obvious place to put the stop is where US Crude was trading immediately before the spike at 15:30. That was a level of 71.18. I was quite happy with my choice as I would have been very disappointed if oil dropped that low after such a bullish drawdown in inventories.

Choosing a limit was trickier as there wasn’t much resistance in the way - clear skies ahead. With a bullish economic report like that, many traders would simply let their position run, hoping that it picks up some momentum and starts trending upwards. Instead I chose a limit level that was simply the same distance away as my stop loss level. As my stop loss was 106 points (72.24 - 71.18) away from my entry point, I placed my limit order 106 points away the order side, at 73.30. That gave me a risk/reward ratio of 1:1, which many traders say is the minimum that you should be look for. As I had no pre-release desire to get into a trade, I wasn’t too aggressive with my limit order.

Outcome

As the chart above shows, US Crude Oil picked back up after its 50% retracement. It broke through its intra-day high at 16:45 and powered ahead. Thereafter I was limited pretty quickly at 16:55 for a 106 point and €1,060 gain. Due to the charting pattern that was developing, many traders would have kept open their position. From 17:00 to about 18:30, US Crude Oil displayed a symmetrical continuation triangle that was being supported by an intraday upwards trend line. A breakout of this triangle to the upside can often result in a much larger move. The market did eventually break out and jump higher again. Hopefully next Wednesday’s Oil Inventories provide a trade as profitable as above.

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