Crude Oil Futures Trading
Great Article From David at Myforexdot.org.uk
This system is a follow up to my articles on different types of markets, trading support and resistance and profitable trading strategies (found on my website) where I examined three different ‘edges’ and the types of markets these edges were effective on. The basic conclusion drawn was that markets are either driven mainly by speculation or mainly by macro-economic fundamentals. For a market that is driven mainly by speculation, buying low and selling high (i.e. trading support and resistance) generally works best, and for a market that is driven mainly by macro-economic fundamentals buying high and selling even higher, or selling low and buying it back again even lower (i.e. trend following) is usually the best strategy.
Markets that are driven by speculation are either directly driven by speculation (an example of this would be commodities like gold and silver), or indirectly driven by speculation (for example the S&P 500 e-mini futures contract where the price is constrained by the underlying index which it’s self is just an aggregate of it’s speculation driven, component stocks). It is on these aggregated derivative markets like the S&P 500 e-mini and the FTSE 100 where the effects of support and resistance are strongest and the effects of the trend is the weakest. The effects of the trend and the effects of support and resistance are almost mutually exclusive, the stronger the effects of one the weaker the effects of the other.
In this article, I am going to test what method is best for trading oil futures, buying low and selling high (trading support and resistance) or buying high and selling higher (trading the trend). I will test this on oil futures data from the beginning of the year 2000 to the 13th of May 2011 downloaded from Wikiposit. I will test two support and resistance trading systems and two trend following systems. The systems are as follows –
Support and Resistance System #1: When the market closes higher than it closed 120 days ago the trend is said to be up and we will only take long trades. When the market closes lower than it closed 120 days ago the trend is said to be down and we will only take short trades. During an uptrend we will buy when the price closes at a new 5 day closing price low and sell when the price closes at a new 5 day closing price high. During a down trend we will sell (go short) when the price closes at a new 5 day closing price high and buy it back again (that is, close the short position) when the price closes at a new 5 day closing price low.
Support and Resistance System #2: System 2 is a variation of system one but it uses a time-based exit instead of a favourable price exit. When the market closes higher than it closed 120 days ago the trend is said to be up and we will only take long trades. When the market closes lower than it closed 120 days ago the trend is said to be down and we will only take short trades. During an uptrend we will buy when the price closes lower than it has ever closed in the previous 5 days and exit in 30 days time regardless of the price. During a downtrend we will sell (that is, go short) when the price closes higher than it has ever closed in the last 5 days and exit the position in 30 days time regardless of the price. During a strong trend this system will ‘pyramid’ as new positions will be added before the previous positions have timed-out.
Trend Following System #1: When the price makes a new 120 day closing price high we will go long and stay long until the prices makes a new 30 day closing price low. When the price makes a new 120 day closing price low we will go short and stay short until the price makes a new 30 day closing price high.
Trend Following System #2: When the price makes a new 120 day closing price high we will enter a long position with a 30 day time-based exit; we will continue to enter long positions on each new 120 day closing price high. Likewise, when the price makes a new 120 day closing price low we will enter a short position with a 30 day time-based exit; we will continue to enter short positions on each new 120 day closing price low. During a strong trend this system will ‘pyramid’ as new positions will be added before the previous positions have timed-out.
Support & Resistance System #1 Equity Curve:
Results: Support&Resistance System #1
Number of Trades: 187
Number of Winning Trades: 121
Number of Losing Trades: 66
Percentage of Winning Trades: 64.71%
Number of Pips Won: 256.95
Number of Pips Lost: 177.67
Win to Loss Ratio (Pips): 1.45 to 1
Support & Resistance System #2 Equity Curve:
Results: Support&Resistance System #2
Number of Trades: 543
Number of Winning Trades: 295
Number of Losing Trades: 248
Percentage of Winning Trades: 54.33%
Number of Pips Won: 1772.35
Number of Pips Lost: 1208.64
Win to Loss Ratio (Pips): 1.47 to 1
Trend Following System #1 Equity Curve:
Results: Trend Following System #1
Number of Trades: 31
Number of Winning Trades: 17
Number of Losing Trades: 14
Percentage of Winning Trades: 45.16%
Number of Pips Won: 113.81
Number of Pips Lost: 71.59
Win to Loss Ratio (Pips): 1.59 to 1
Trend Following System #2 Equity Curve:
Results: Trend Following System #1
Number of Trades: 309
Number of Winning Trades: 164
Number of Losing Trades: 145
Percentage of Winning Trades: 53.07%
Number of Pips Won: 1095.03
Number of Pips Lost: 721.01
Win to Loss Ratio (Pips): 1.52 to 1
Oil Futures Trading Systems – Conclusions
The ratio of pips won to pips lost is usually the single best guide as to what is and isn’t an effective trading system, but whilst a good winning pips to losing pips ratio is vital for a trading system’s success, it is not the be all and end all. As the system’s equity curves show, the trend following systems were usually losers and were only profitable during the rising and bursting of the oil price bubble of 2008. Oil rapidly rose to over $140 per barrel in 2008 then the price fell even quicker than it rose to around $35 per barrel when the bubble burst during the global financial crisis.
I think the best oil trading system was the first system, buying low and selling high during a bull market, or going short on a recent high and waiting for a recent low to close the short position during a bear market. I would therefore conclude that like most other commodities, the oil market tends to be driven by speculation more than macro-economic fundamentals, except, perhaps, during times when there is a supply crisis; and that trend following systems are best avoided except when the market is in an irrational price bubble, which rarely happens.
Whether oil prices continue to be driven by speculation will remain to be seen, I personally believe that the point of peak oil production has already passed and if it hasn’t then it’s surely just around the corner, but for now at least, the oil price (like the prices of other commodities) is driven by speculation and the best edge(s) for trading oil futures therefore come from the effects of support and resistance.
Thanks again to Wikiposit for the data.
