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A Data-Driven Approach to Trading Crude Oil

By:Frank Kaberna

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.*

Crude Oil Price History

Price chart for Crude Oil price history from 1992 through 2020, and shows that the price has always been between $10 and $145 historically.

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.

Decrease Memory, Increase Data

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?

SMO \ A Day in the Life

Standard deviation bell-curve chart for SMO, which shows that one standard deviation is 1.32

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.

68% of the Time, It Works Every Time

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.

SMO \ Last Monday in the Life

Chart showing SMO prices from open to close for Monday, Aug 02, 2021, with a horizontal line marker indicating the 1 Standard Deviation. The price stayed below the 1 Standard Deviation through to close.

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.

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Save Every Time You Trade The Smalls

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 tastylive, Small Stakes, where Pete Mulmat and I will show viewers how to navigate Small Exchange products every Monday-Friday and always on demand.

If you’d like to find out where to trade the Smalls products check out the list of brokers that offer their products, or tastylive’s preferred broker tastytrade.  

*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.

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