A Data-Driven Approach to Trading Crude Oil
Aug 18, 2021
Crude oil can be viewed as one of the few markets that trades in a range; that is, the price of a barrel of crude has been as high as $145 and as low as $10 while always existing somewhere in between.*
Source: US Energy Information Administration (eia.gov)
In the same time that the range for stocks like AMZN can shift higher by $100s or even $1,000s every few months, crude oil has rallied to but not topped $75 on multiple occasions.† Commodities are often popular day trades for their range-bounded and mean-reverting attributes, but traders can be reluctant to jump on the action when crude starts moving multiple dollars per day as it did last week.
Those who sold $100 crude as it blew up to $140 in 2008, or bought $30 oil before its brief collapse below $0 in 2020, know that mean reversion works until it doesn’t. Outliers can cause hesitation for even the most mechanical people, but some of the best day traders live in the moment with no fear of the past. How do they do it?
Source: dxFeed Index Services 5/1/21 to 8/4/21 (https://indexit.dxfeed.com)
Data can reduce emotion and other irrational influences to help create memoryless strategies that only act on statistical edges in the market. The standard deviation on SMO, for example, shows a 68% chance of Small Crude Oil futures closing in its range. Data-driven traders can buy or sell outside of that range on a net change basis with their 68% edge while giving no thought to yesterday.
But, of course, data does not hold 100% of the time. The standard deviation is in fact designed to be wrong 32% of the time, since, if it were correct 100% of the time, the market would never reach those bounds. The idea is to reduce losses to the same amount as gains on those 32% days by defining risk in futures and taking losses at predetermined levels.
Source: dxFeed Index Services (https://indexit.dxfeed.com)
For example, if you bought SMO around its 1 standard deviation on Monday, August 2nd, and took a $50 loss, you could have bought SMO around the same net change level on the following Tuesday and Wednesday and taken $50 profits from both.
The fear of what could happen will always be there, but data can help traders forget their memory and take advantage of the opportunity at hand.
Follow us on Twitter: https://twitter.com/small_exchange
Subscribe to our YouTube Channel: https://www.youtube.com/channel/UC5pAsul3H_7FYuPmZscClrA
The Small Exchange has also created a limited number of memberships for a one-time payment of $100 that give traders a lifetime of reduced exchange and market data fees when trading the Smalls.
For more information on the Small Exchange’s products and memberships, visit smallexchange.com. And be sure to check out my new show on tastytrade, Small Stakes, where Pete Mulmat and I will show viewers how to navigate Small Exchange products every Monday-Friday and always on demand.
*Spot crude oil prices from 1/1/90 to 8/4/21 from eia.gov
†AMZN and spot crude oil prices from 1/1/18 to 8/4/21 from finance.yahoo.com and eia.gov, respectively
© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastytrade is a trademark/servicemark owned by tastytrade.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).
tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.