Oil is one of the over fifty markets that we follow and review daily. We added Oil to our watchlist because it exhibited characteristics of a trending market with a number of higher highs and higher lows.
This chart shows a two year trading period with an uptrend throughout
Our trading strategy has produced an entry signal three previous times during this trend. These entry signals are represented by the green arrows on the chart.
One after price crossed the 200 DMA in late 2020. One in the fall of 2021 and the other at the beginning of 2022.
Another interesting fact about this trend is that if you listen to the media the war in Ukraine is to blame for the surge in oil prices. The start of the war is represented by the orange line on the chart. You can see that the upward trend in oil was clearly in place way before the start of the war. Our previous entry signals were before the war started. The war has increased volume and volatility as highlight by the orange circles. This could amplify the trend in the coming months
We are trading the HUC ETF in Canada but a similar trend exists on USO and BNO oil ETF's in the US.
On the above chart we have now zoomed into a six month trading period.
Our Trading Rule #2 identifies potential trade setups for securities on our watchlist.
The Crude Oil ETF became a potential trade set-up when it broke out and closed above the previous high of $23.59. The breakout level is illustrated by the dashed green line on the chart.
Our trading rule number 3 states that we will enter the trade if there is a follow through on the breakout .
We placed a buy stop order with above the breakout close at $23.72 and our order was filled getting us into the trade. Our entry level is indicated by the pink line on the above chart.
Our Trading rule #4 states that we must know where we will get out if we are wrong and the upward trend does not continue. And as with most successful traders we are wrong more that we are right.
We placed our stop loss at $21.95 which is shown by the pink line on the above chart.
Will calculate our stop loss using Average True Range which measures the average volatility of the ETF over the past 20 days.
You can see from the graph in the bottom of the stock chart that the ATR was $0.59 when we initiated the trade.
In order to give the trade some breathing room we use a 3 x ATR which in this case is $1.77.
We calculate our $21.95 stop loss price by subtracting the 3 x ATR from our purchase price. As soon as our entry order is filled we place our stop loss order with our broker so that the trade will automatically be closed if the stop loss price is hit.
Once we know our entry price and stop loss price we can calculate how many shares of the ETF we should purchase.
In this case we are willing to risk 0.75% or $750 of our theoretically $100,000 portfolio if we are wrong.
By dividing our bet amount of $750 by the difference between the purchase price and stop loss price we determined that we can buy approximately 4250 shares of the security. Defining the bet size of ever trade is the key to long term trading success.
As you can see in the above table we currently have 7 active trades. All our active trades are commodity related and primarily in the energy and agricultural space. The commodity space has been consolidating over the past three months but many of these markets appear ready to breakout and resume the upward trend.
We are currently about 90% invested.
Our trading strategy currently has a 38% success rate which is right on target.
As of the end of April our trading strategy has 15% YTD return.
We are not suggesting that you should purchase the securities that we highlight in this blog but rather see the steps, and the thought process, we go through to remove emotions from the trading process and systematically implement our trading rules.
It is our belief that each trader should develop their own trading strategy that fits their personality and with rules they understand and can systematically execute. If you are interested in building a personalized Trading Strategy please Download Our Free eBook "How to Build a Systematic, Rules-Based, Trading Strategy" and get started trading your way to financial freedom!