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I am starting a new thread on energy trading because I believe that volatility in the sector offers good opportunities.
My trades are mainly position traiding.
I keep the analysis easy: look at what the commodity is doing then look at the XLE/ERX ETF and/or some producers.
The basic idea is always to follow the main trend. This is similar for all trades.
Oil is bouncing today but large players are not buying. The green line shows large investors. The red shows small investors.
SCO seems to be attracting money (SCO is the inversed oil ETF)
We can see that SCO is pulling back within a longer-term uptrend. This means that we could buy the pull-back if we believe that oil will be weaker again. That is the hypothesis. This hypothesis seems to be what large players are trading right now.
If this hypothesis is correct, the stats for a long SCO trade are below.
Of course, if the hypothesis is wrong, we will need to get out of the trade. This is why we have a stop below the envelope. The envelope catches 90% of the bars during the analysis period. This means that if we break this envelope on the downside, we will be in a low probability environment which will point to a trend change.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,388
Thanks Received: 10,207
Greetings EV trader.
You'll find a several CL and NG threads in the "Commodity Futures Trading" section, some of which have posts regularly and others that have them far more rarely. You'll also find that the " Selling Options on Futures" thread over in the "Options and CFD Trading Forum" has some interesting discussion on both CL and NG, but you'll have to wade through a lot of options posts to find them.
Can you explain what LEV and SEV is, and how it's calculated?
I found When to use LEV/SEV divergences at effectivevolume.com but it fails to answer that question.
Finally are you trying to imply that SCO which traded a notional value in the tens of millions today is a better indicator of what's going to happen in the oil markets than the CL future which traded a notional of billions?
I am not a Futures trader, and hence limit myself to ETFs/Stocks. So this thread will be to discuss ETFs/stocks related to energy.
SCO has no influence at all on the oil price, but the EV pattern for SCO has been a good indicator in the past.
I would however not go against the oil EV indicator itself. So both need to point in the same direction.
About Effective Volume:
The Effective Volume is calculated by using the following formula, which is a modified version of Larry Williams' A/D (Accumulation/Distribution) formula:
Do not forget to multiply the result by the price inflection direction (+1 or -1) if the price increased or decreased
Closei-1 = Closing price corresponding to Time Interval (i-1): TIi-1
Closei = Closing price corresponding to Time Interval (i): TIi
Highi = Max (Highi , Closei-1)
Lowi = Min (Lowi , Closei-1)
PI = Price Interval (usually US$ 0.01).
ABS= Absolute value
If (Closei-1 = Closei ) then EV = 0
As you can see, the Larry Williams formula was changed in two ways:
1.I replaced the Open of the time interval by the Close of the previous time interval. Of course, I had to adapt the High and the Low of the current time interval to the value of the Close of the previous time interval.
2.I added the PI number, usually 0.01, to take into account the very small variations that occur during one time interval.
It is a minute based indicator. Each minute, you get the volume that is responsible for a price change. This is the definition of Effective Volume.
I then operate a statistical separation between large and small effective Volume (LEV/SEV). This tells me what large players are doing. This separation method is operated every day. It allows to somehow reconstitute large directional orders that institutions are slicing and dripping in the market as a function of the available liquidity.
This indicator works well when the price reaches some support/resistance zone or any zone of equilibrium.
When I combine the EV indicator on many stocks on one sector, then I can measure the Money Flow moving in/out of a specific sector.
You can see below the MF pattern for XLE. A few days ago, XLE dropped hard, but money was not moving out. This is a sign of a probable buying opportunity.
Yesterday, at 11:42, XLE reached a peak, while oil reached a peak a few minutes earlier. Then there were a few big selling waves on oil, but XLE stayed rather high. This tells me that XLE could pull-back next week, especially if oil does not bounce.
With the KOL short example, I want to point how easy a trader can try to make the data confirm his bias.
The idea to short KOL is simple: oil is down, which means that all other energy producing companies that compete with oil will have difficulties selling their products.
The second reasoning is that since China is slowing down, there is less need for coal.
We can see below that the EV pattern for KOL is rather negative. (TEV = Total Ellective Volume = LEV + SEV)
Good confirmation!
In terms of settings, KOL failed at its 50MA and seems to be wanting to turn down.
Therefore, the risk for a short trade seems limited.
Indeed, if I run my trade analysis software for the past 50 days, we can see that stats look very good!
A Risk/Return higher than 2 indicates that you risk 1$ to gain 2$
If I leave the analysis at this point, then I might fool myself.
Indeed, all these settings look perfect, but 50 days is not long enough.
We can see below that KOL has been in a downtrend for at least two years.
Hence, if I try trade analysis software for a period of 450 days, using exactly the same settings, then we get much different results. A risk/Return slightly lower than 1 is about the same as what you get at the casino.
At this point, the trade might still work, but I should not be too confident in this obvious trade.
If I could find this obvious trade, many other traders have found it too. The trade might be crowded! Or I might have to find settings that have also worked well in the past. For example, a break below the lower part of the price envelope would lead to a better trade, because that would have confirmed the failure of the bounce.
Also banking on a downtrend this session.. faded the bullish move at 77.82.. Will implement a loose trail and see how we go.. I would say most long stops will be just below 77 so if it break this level we are in for a down day!
Some thorough analysis there btw.
