The Crude Oil futures contract (CL) strikes fear in the
heart of many beginning traders because it can, at times,
be a volatile beast. But such is not always the case; the
majority of the time the CL contract moves at a brisk
pace and displays characteristics that not only make it a
tradable contract, but a highly desirable instrument to
trade. There are some ideas I will share that might make
this contract a bit more docile to the uninitiated and
downright attractive to intermediate level traders. Trade
this contract with care and you can be handsomely
rewarded.
1. Avoid trading the CL around the release of the Weekly
Inventory report, which is usually on Wednesdays at 10:30
EST. There are some variances to this time and date on
weeks which include a holiday; then the report is usually
released on Thursday at 10:30 EST. You can check the time
and date on any one of a number of financial sites which
list all of the daily announcements and forecast numbers.
When Weekly Inventory Report is out of line with
projections the market can make some very wild swings in
a hurry. Of course, if you are on the right side of the
contract this can be a great thing, but if you are on the
wrong side of the contract it can be disastrous. More
often though, the CL will swing wildly both long and
short and you may find yourself stopped out with a
substantial loss. That being said, it just a better idea
to let the report affect the markets as it will and wait
until it settles down to begin trading again.
2. Set a specific stop/loss target based upon 2x the
Average True Range and don't ever move it to accommodate
a losing trade. The number of contracts to trade should
be determined by the size of the trading account.
Remember to never trade more than 1-3% of your account on
any given trade and you will stay in the safe zone. I do
not typically set a profit target as this contract has a
tendency to run and I want to take advantage of that
characteristic. I'm not a big fan of trailing stops, and
the market noise in this contract can exacerbate the
problems with trailing stops. Namely, if you set a 3 tick
trailing stop you are likely to give up three ticks
because there is some market noise to deal with when
trading the Crude futures. On the other hand, don't get
greedy with the CL. I am always delighted with a 20 tick
gain and if I see the market price begin to falter in
this range I quickly exit with a profit.
3. I like to trade the CL futures contract from about 7
am EST until 10:30 am EST as that time period seems to be
one the consistently produces the best results. The CL
contract trades on the Nymex and opens at 9:00 am EST, a
full one-half hour before the financial markets open so
be aware this contract will swing to life at a time you
may not be accustomed to trading. (as most CME cash
trading hours begin at 9:30 am EST) Try to avoid the
first few minutes of the opening as there can be some
unwanted volatility at the call.
4. I enjoy trading this contract for one very specific
reason; it tends to respect support and resistance. This
is not to say that it never breaks support and
resistance, it does. But in general it tends to honor
support and resistance with surprising regularity,
considering the unruly behavior it sometimes displays.
Like all futures contracts, you can get some clues as to
whether it may break through support and resistance by
monitoring volume and my ever present order flow monitor.
This contract lends itself very positively to order flow
and tape reading as it moves along and these tools are a
must for trading the CL. Of course, I am a real-time
trading believer for all futures contracts, but some
contracts lend themselves to order flow better than
other; the Crude Oil futures contract is one of those
contracts. Lagging indicators will prove problematic on
this instrument.
5. Make timely entrance and exit trades. Even on a slow
day this contract can clip along at a brisk pace and you
must trade with the tempo of the contract. If you are
accustomed to trading the ES, which tends to languish at
certain price levels as the High Frequency Trading bots
battle it out, the Crude contract will be a pleasant
surprise; it actually moves continuously on most days.
Having said that, you have to be ready to enter at the
point of your choosing with due haste and take your
profits when you deem appropriate. Don't get the
"analysis paralysis" syndrome on this contract, as it may
move against you as you ponder whether to stay in the
trade or exit... you may not have a choice if you wait
very long. Enter with conviction and make sound decisions
to exit with conviction. Or, more simply stated, "don't
dilly-dally around on the CL." Get in and get out without
a lot of over-thinking.
In summary, I have encouraged traders to consider the CL
for their trading portfolio as it presents some great
opportunities to profit after gaining some experience on
its patterning and movement. I have given some tips on
trading the contract in a manner that is consistent with
the movement you can expect and encouraged all traders to
be decisive and prompt in both their entries and exits.
As always, best of luck in your trading.
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