June 11, 2008
Lesson in Trend Trading: Crude Oil
The monthly trend in crude has been continuously up since April 2002. The weekly trend has been continuously up since April 2007. What this means for traders working off the daily chart is that there has been only one side of the market to consider: the long side. Here’s an animated lesson that I hope makes this clear. I’m looking forward to comments!
Cat: | Time: 9:19 am (utc+8) Comments (0)
June 11th, 2008 at 9:38 am
Chairman,
Very nice! Just one suggestion… after each comment of yours, include something like (Fig. or Comment 1 of 4, etc,) so that viewer can anticipate how many more slides ahead, and if the end of the lesson has reached. Just my $0.02.
Regards!
June 11th, 2008 at 10:18 am
CDt: Thanks for the very good suggestion, I’ll add it when I get a chance later.
June 11th, 2008 at 7:09 pm
Very cool charts.
The trend definitely is your friend, at least if you want to trade a compoundable style.
June 11th, 2008 at 7:49 pm
Markus: Thanks, I got worried because these last several months so many commenters were saying things like short USO and get long these ultrashort oil things, and I thought if you’re doing that you’re fighting the tape (not that you can’t do it, but you have know what you’re doing).
June 12th, 2008 at 12:54 am
Very nice illustration charts. Keeping it simple, go with the trend. So easy to say, yet so hard for some traders to do.
June 12th, 2008 at 3:14 am
CM: If the trend is your friend, how come you keep trying to pick a top in gold?
June 12th, 2008 at 6:46 am
@cdn: A fair question, but as you know I’m a card-carrying member of Top Picker’s Anonymous. I’ve tamed my countertrend impulses as I’ve gotten older and wiser, but still make terrible mistakes, like the whole Ten Financial Stock I Like fiasco last August. By the time I hit 40, I hope to have everything figured out.
June 12th, 2008 at 7:29 am
I have this problem a lot. I see traders making money and figure it must over. I need to believe the tape more….. so time to short the Naz? The tape sure sucks.
June 12th, 2008 at 8:00 am
CM: some of us at 40 or more (ahem) are still fighting those impulses.
BTW, I forgot to say, I do like these .gif thingies you’ve been generating.
June 12th, 2008 at 1:23 pm
The trend is your friend, but commodities (and forex) trend much more strongly than stocks. Very few stocks will exhibit such a strong trending behavior over such a long period. Ignoring the daily chart would be unwise when dealing with equities (in my experience).
June 12th, 2008 at 4:18 pm
Yeah, when i see a run up like that i always second guess myself and the contrarian side of my mind takes over
too bad for me 
i just can’t overcome the fact that there’s still room to run, I always feel that it’s too late for me to jump in. When oil was at mid 90 I shorted it (contrarian mind) thankfully i got out when it dipped to mid-80, then I was patiantly waiting for it to pass 100 to short it again, thanks god I was tied up in other trades with no money 
lesson learned
June 12th, 2008 at 5:25 pm
Well done. Nice approach. But how do you know when the trend has ended? You add in a dip, and boom – the dip breaks like the chinese stock market.
Also, cant tell the difference between the first few slides and the last few. Thanks
June 12th, 2008 at 6:23 pm
Rod: You get long off the daily only when the uptrend resumes (bars go from red to green). When the market tops you’ll likely take some hits while the weekly reverses. The main point I’m trying to make here is “don’t fight the tape.”
June 12th, 2008 at 9:21 pm
Thanks Chmn. Yes, dont fight the tape. Flow like a river.
June 13th, 2008 at 12:39 am
In January 2007 I lost 75% of my trading account on long side of the oil. Still can’t believe it…
Since then I have never touched “oil” again… It always seemed to me, that price has gone too far…
Its all about timing :->
Thank you for nice lessons.
June 13th, 2008 at 1:39 am
I’d like to read some studies comparing the trending character of commodities/fx vis a vis stocks. Leads, anyone?
June 13th, 2008 at 1:47 am
Chairman, do you still have WAMU?
June 13th, 2008 at 7:07 am
@UkrBear: If you’d like to share, how exactly did you do that? What was the actual position? Futures? Options?
@Soulek: Yes.
June 13th, 2008 at 11:32 pm
In December 2006 a friend of mine shared with me some analytical information which he somehow received… One of the key moments in that deep analytical survey was a prediction of an unstoppable uptrend in oil. Reasons which were laid there convinced me…
I looked for a way to take part in this “party”… And saw that the “cheapest” way for me were turbos from ABN AMRO.
These certificates include so called “stop loss”. Closer is Stop loss to the current spot price, cheaper is this certificate. In case if stop loss level is reached by commodity (or any other underlying instrument: index, shares, etc.) you lose your turbos… You don’t lose all your sum, but about 80-85% of it.
So, on Jan 2, 2007 I bought 750 Brent Crude Oil Future Turbo Long 51,43 at a price of 11 euro per Turbo and as you can read in the title of this turbo – its stop loss level is 51,43… In 7 days turbo went to trade around 6,5 euro. Later my Turbos disappeared due to a stop loss… And with it almost 75% of my trading account… One of my decisive mistakes: I had to buy certificate with a lower stop loss… let’s say 46… or lower… I didn’t realize at that time that prices “like” to go to round numbers… Actually, I knew almost nothing about markets, technical analysis, etc…
I was so shocked… With what was left I tried to reenter on January 28… But, exited same day with a “moderate” loss.
When I reconstruct that events and my behavior… It just make me laugh now… But, in that time… It was quite sad. In any case it was one of the most expensive lessons for me and thanks to your post I realized that I still haven’t made all necessary conclusions from it.
June 14th, 2008 at 12:47 am
Wow. My non-trading friends think that *I* trade exotic instruments!
June 14th, 2008 at 1:33 am
@steve
Ukrainian Bears instruments are simple “securitized derivatives” or “warrants”. See for example:
http://www2.goldmansachs.com/services/investing/securitised-derivatives/index.html
http://www.dbwarrants.com.hk/EN/showpage.asp?pageid=29
“Turbos” or “Mini-Futures” mimic real futures. EUREX (Germany) for example does not offer small “e-mini” futures contracts nor options which are affordable for the individual trader.
Quote DB.com:
“The warrants issued by the Issuer have not been and will not be registered under the US Securities Act of 1933 and trading in the warrants issued by the Issuer has not been approved for purposes of the US Commodities Exchange Act of 1936. The securities may not be offered or sold in the United States, to US citizens or US residents.”
June 14th, 2008 at 2:11 am
…to be more precise:
“Warrant”: International common naming for securitised options.
“Turbo”, “Mini-Future” (Germany); …and, it seems: “Cat. R CBBC” in HK (Brochure in chinese only) = securitized (mini) futures.
June 14th, 2008 at 5:28 am
@Ukrainian Bear, wow at least I can say you had balls
not knowing s**t about markets, analysis and financial instruments you did it like a man, ALL IN!!! 
money were lost but the lesson learned from that mistake is invaluable, at least I hope so 
June 14th, 2008 at 7:09 am
@UkrBear: Thanks for sharing the details. I’m not familiar with “Turbos” but they sound like the kind of illiquid, leveraged instruments I’d avoid.
June 14th, 2008 at 8:08 am
Chairman, these instruments are not illiquid; you are buying them from and selling them to the issuer – who permanently (during the trading hours of the underlying) quotes prices. This is not a problem in the case of “Turbos” as the value is easily calculated (comparable to a CFD, which are popular in UK) but probably more so with “warrants” as the price/implied volatility is not the result of market transactions; it is the volatility calculated by their propietary pricing models.
The biggest risk, however, is their systems not running and no quotes available – meaning you can not get out of a position for some time.
June 14th, 2008 at 8:35 am
J: OK, thanks for explaining how they work, I have no experience with non-exchange traded stuff.
June 14th, 2008 at 10:22 am
Chairman,in looking for weakness within strength, you are using weekly as a basis and daily for entry. How do feel about using daily as basis and 60 minute for entry to take advantage of shorter 1-3 day moves and trade using front month options? Also, what do you use to show color change? A move above a moving average or just a green candle, close above open? Thanks for the lesson.
June 14th, 2008 at 10:38 am
johnny: Yes, it makes sense to look at the daily when you’re trading off an intraday time frame, but the dynamics of intraday trading are such that it becomes a little less important to obsess about higher-time frame trend. A lot of subscribers use options to take advantage of the ideas but I don’t know exactly how they do it. Fuzzy is a very sophisticated trend following system (color changes), but you could use anything that makes sense (like moving average crossovers) as long as you’re consistent.