Welcome to the Compound Trading Group Private Client Series: Crude Oil Trading Strategies With The Highest Returns.
Introduction:
This document series will cover the best oil trading strategies we have garnered in our intensive research and application in real world trading (both mechanical human executed day trading and machine driven trading).
It will encompass what I have learned in my thirty year personal journey as a trader as well as the intensive deep research we have done at Compound Trading Group over the last two and a half years. The latter being more in depth than my own personal thirty year trading journey.
But first, bear with me in this introductory document as I provide important perspective for those new to our trading group, those to come in the future and of course for clients and stakeholders that have been with us for some time.
I will then share in great detail much of the best oil trading strategies we know.
The Release Process of Our Data.
This (the Crude Oil Trading Strategies with the Highest Returns Document Series) will be released in parts as data is consolidated and documented over the next month prior to our going private at the end of April 2019. “Going Private” meaning that just anyone off the street will not gain access to our crude oil trading data services simply because they paid and subscribed (more on that later). “Consolidated” because we have lived in a petri dish of oil trading data discovery for the last 2.5 years, and let me tell you, there is a need for consolidation of the data. “To be released in parts” because we have to author the series, and fast (before the end of April) – yes, this is a grass roots, organic, transparent upstart.
What Will be Made Public and What Will Remain Private. Our Edge.
Some of the documents in this trade knowledge consolidation series (or portions thereof) will be made public for various reasons, but most key data will not be made public.
Not all we have learned about the nature of crude oil trade will be released to even our key commercial clientele. Some knowledge must remain proprietary to our clients and some other proprietary for the benefit of our clients. In other words, we have an interest in maintaining a certain trading edge to our benefit and on behalf of our clients.
It is an interesting balance. For example, another goal within this series is to release enough data (or better described as the most pertinent data) needed for our client traders that are manually executing trades to use as the most actionable strategies for trading crude oil day to day (intraday crude oil trade and swing trading).
Another noted benefit of this series is that our stakeholders and commercial clients will gain an understanding of our growth processes (the discovery processes) and our rules based trading systems. This will facilitate understanding and provide for better communication with all involved.
Below I summarize our journey to date and then the first article in this series will be released before our oil trading webinar tomorrow. We expect new document posts in this series to be delivered to our clients at a rate on average of about one every two days between now and end of April, 2019.
An Important Time for our Oil Traders, Trading Team / Staff Developers, Client / Members and Stakeholders of Compound Trading Group.
Why? As I pointed out, tomorrow is our first (and very important) Oil Trading Webinar (an important focused opportunity to share in detail the best oil trading strategies we have learned), we recently started providing oil trade data to the SOVORON machine trading service, we are taking our oil trading alert / subscription service private soon and most importantly we recently finished our two and a half year systematic exploration of all crude oil technical trading methods we had set out to test, trade, code and re-test over and over again.
In other words, we are at an inflection in our growth process – at certain junctures in growth you have to trim off what doesn’t work and build roots in what does.
We are going private to take our current clients with us and cease spending time with on-boarding “new” clients. Not because we don’t want new clients, we simply don’t have the time for new clients and I want more time with our core clients.
But every business wants new clients! Not really – not the typical retail type client. We’re best suited to commercial trading groups. We want partners in our journey, traders in a core group, friends, comrades, those that are on a quest to be better and do better – be the best they can be in the markets…. those type of people and up and coming enterprises… but not your average retail trader that isn’t serious about a life long journey in the markets. Those folks are better managed by other groups.
And hey, if we’re as good as we think we are (or should be by now) then we should just be able to trade it up without a subscription service right? Exactly. One way to look at it.
We’re just built for a different type of client. Our commercial trading group clients, retail traders that are very serious and other specialized type of clients are our thing.
Truth be told, we are a privately financed operation with significant overhead (team staff etc to develop our machine trading related platforms) so we need to focus on profit, profit derived from our trading and in turn providing that data to commercial groups that also aspire to a greater than typical trading profit.
And to be perfectly frank, we want to build something exceptional, lasting and moderately revolutionary. Our goal is to build the best trading group in the markets and provide our success knowledge to others that are as serious as we are.
So we want to complete our development process in crude oil trade and soon get on to our swing trading platform (next) and the other algorithmic trading models such as SPY, Gold, Silver, Bitcoin, VIX, DXY and more.
Information Released to Date and Going Forward.
I know over time I / we have talked about moving toward solidifying / reconciling all we have discovered thus far as it relates to the historical nature of oil trade, but to be honest we didn’t know how far that journey of discovery would go so releasing specific data (the rule-set) was difficult – we didn’t know how deep the rabbit hole was.
We still haven’t rolled every rock, we know there are more but we don’t have time, so we have prioritized the rocks to roll over and we did that as publicly and transparently as we knew how. Although more recently I have to admit there are some things we just haven’t shared (special nuggets of data that obviously will provide a significant proprietary edge for us and our stake-holders / clients at various levels).
The point being, we have released some articles and we have promised more. This is the start of the more.
You can find previously released oil trading strategy articles here.
What We Set Out To Do and What We Plan Next. The Big.
In our journey we prioritized structured trading as it applies to thirteen time frames on conventional charting (one minute trading through to monthly time frames) and how various time cycles, order flow, liquidity, events and such determine crude oil trade within the specific structured time-frames.
I would think as a result of this deep dive in to the data that we are now one the worlds most knowledgeable groups as it applies to the trading structure of crude oil. Not just because of the data historically, but the data as it relates to the living moment to moment tick by tick trade of crude oil.
Looking at historical data is one thing, but relating that to real-time trade (by the tick living in the trade), applying that to real world trade and coding it is a completely different level of data analysis and trade platform development.
Our next is to be one the worlds most profitable oil trading groups and most sought after data providers. That is our goal.
How We Intend to Accomplish Our Goal. The World’s Best Oil Trade ROI.
As I noted above, “at certain junctures in growth you have to trim off what doesn’t work and build roots in what does.”
The only way to do that is to drill down and focus on (only trade) what we now know about how crude oil trades – the natural structure of oil trade. Sure there are anomalies on every time frame, but every financial instrument has a natural trading structure (the DNA of the instrument).
You can see this (what doesn’t work) in our own oil trading returns and alerts – in January we traded oil accounts up over 60% then in February 30% and in March some accounts are red and some green (referring to specifically only what we publicly alerted). The worst of our accounts are down about 3% in March thus far.
This example is a reflection of us in a real life setting executing real-time trades and applying that which we have learned (the rabbit hole of historical data), how to trade the data, can it be coded and executed like the data suggests? What works best? Why? And more.
Quite literally we grew our monthly returns month over month the last few years until we peaked in January and then our returns started to come off on a month over month basis. This is no random occurrence.
How does that happen?
As we got further and further down the rabbit hole we went to lower and lower time frames of trade, we learned more and more. We found order flow details, structural trade details and time cycle events that most would not know about. We found all kinds of details that we had no idea were there.
But what makes sense on paper (what mathematically works based on historical back testing) and what can be applied in real-life practice are two different things as you get down the rabbit hole (lower time frames), in other words in High Frequency Trading (HFT).
What makes sense on paper (what mathematically works based on historical back testing) and what can be applied in real-life practice are two different things
The easiest way to visualize this is to imagine it all (the financial instruments in markets on various time frames) as structures. We have learned that there are structures of trade (charting, geometric patterns and such), there are structures of liquidity and various other structures that assist in understanding the nature of crude oil trade.
This video will give you some insight “The mathematician who cracked Wall Street | Jim Simons” as will these rudimentary oil trading room videos from our day to day trade Oil Trading Room – How to Use EPIC the Oil Algorithm Model Chart and Oil Trading Room – How to trade intra day w EPIC the Algo Charting.
What Does Not Work.
Specifically and more recently, we have found what doesn’t work for us, it may work for others but it definitely does not work for us.
What is that? High frequency machine trade (HFT) on the lowest time frames. I am referring to high frequency machine trading on the one minute, half minute and quarter minute time frames – yes, we went that far down the rabbit hole.
How and why did we chase oil trade down to the lowest time frames?
Why? To gain competitive advantage we specifically chased liquidity in oil markets that move the price of oil. We wanted to know when specific entities are in trade so we can choose to be with them or not.
We not only want the structure of trade on all time-frames, we don’t only want the time cycles of trade on all chart time frames, we want to know WHO IS AFFECTING THE PRICE OF OIL and how we gain advantage with that. This is our IDENT program. We want the structure of trade, the timing of trade and what entities are trading.
How? We chased the order flow, the order book, the liquidity in the oil trade in markets using every data provider we could find. We chased the order flow tick by tick and back tested the order flow under the exact same methods we back test charting or trading structures. On every time frame sixty months back tick by tick and then bringing all that data back up to real-time and testing it tick by tick for months.
The structure or pattern of liquidity provides an ID.
You can’t imagine the affect that process has on your mind haha.
Anyway, we discovered that the high frequency machine trading specifically on the lowest time frames with what we refer to as the micro players works on paper (the back tested math works) BUT IT DOES NOT WORK IN PRACTICE.
This is why some of our account P/Ls are moderately red and some moderately green in March of 2019. This is how we went from over 60% returns per month in January to near 0% in March.
And we still believe our goal is 100% + per month (50% being minimum on average). Yes, this is true. In fact, our software techs spoke of 500%, but that was only possible in HFT as it related to what I describe above as what works on paper but does not work in practice.
Why Does High Frequency Machine Crude Oil Trading on the Lowest Time Frames Not Work?
High frequency machine trade on the lowest time frames in crude oil does not return nearly as well as the return that structured larger time frame machine (or even mechanically execute human trade) can provide.
Our optimum returns are in the thirty minute structure referencing the one minute time frame for specific entries and exits taking in account the key resistance and support of the various other time frames.
I can’t reveal everything because we are still going to uncover some rocks to confirm our conclusions, we still hold some hope that some day we will crack the code to successful HFT on lower time frames, but we don’t have much hope. We only have hope in theory because of the potential returns (as back tested on paper) but in practice we don’t see it being possible.
Our interest is specifically in being the best at executing the highest probability oil trades within well defined historically back tested structures (oil trading strategies) that have a clear risk reward control mechanism with the highest ROI possible in that frame work.
Anyway, here are some reasons why HFT on the lowest time frames does not work in practice;
- Risk – Reward Controls. The range of trade that the micro entities are competing in are 5 – 10 ticks. A 5 – 10 tick range is not bad on paper if you can win 80% and control risk, but when you factor in what actually occurs in practice with liquidity, order execution fills, stops, volatility within that specific range at specific timing you then get a poor result. There are various methods to “game” the system such as faster computers, location of computers to exchanges, faster connections and such, but we aren’t interested in competing in that space. Our interest is specifically in being the best at executing the highest probability oil trades within well defined historically back tested structures (oil trading strategies) that have a clear risk reward control mechanism with the highest ROI possible in that frame work.
- Range. As I said above, a 5 – 10 cent trading range in oil is okay, but range isn’t everything. What you see on your screen (or what your computer software sees) is not necessarily what your order fill will see.
- Stops. Stops have to be used to limit risk. We use sophisticated dynamic stops that work extremely well if we are not trading in the lowest time frames with the micro HF competitors. They are competing in a ranges that sees volatility flash 5 – 10 ticks in a micro second. It’s a race to execution by the fast machines with the fastest internet connections etc. This is not an ideal environment for stops that are vital to protecting equity.
- Order Fills. Order fills (given the above control issues) are not realistic to your expected result because trading ranges on the lowest time frames change in a blink of an eye, which isn’t a big deal until you are competing machine to machine in a micro environment. Order fill control is not reality in this realm. Not in the way we expect anyway. We can achieve a much higher control in an exceptional ROI environment in a 30 minute structured time frame.
- Liquidity. Liquidity on the tightest time frames changes fast, too fast for our risk threshold. This is an issue for us on many levels.
So in short, what happened with our development the last month or so is that we went after the pure math (and not structured set-ups and strategies) as it related to tight time frames and high frequency because it made sense on paper. On paper if the trades executed as the back tested math revealed then returns of up to 500% per month would be possible. But in practice trade set-ups with defined structured set-ups that have controlled down side with 5 or even 10 to 1 risk reward work much better in practice. This is a much better oil trading strategy for machine trading and for mechanically executed human oil trade.
I won’t go in to every detail as I said but HFT on the lowest time frames is ridden with hidden problems and you can’t know until you develop it, code it and put it in to practice, which we did. It is far too difficult to control outcome and we want highly controlled trading environments only. For us, HFT on low time frames is not the best ROI by far.
So What Oil Trading Strategies Are The Best That Provide Highest Return and Lowest Risk?
In our development process we identified the 20 – 40 largest machine liquidity entities in oil trade (we call the primaries) and 200 or so secondaries and a host of what we refer to as micro machine trading entities (HFTs).
Our highest predictable return is trading crude oil with the secondaries and taking in to consideration the primaries. The primaries are not using our methodologies of trade and as such we are still working on this specific area. The micros are competing for small returns many times a day but this is ridden with all kinds of problems as described above.
Our best tested (real world test) results have been with the broad market liquidity (the secondaries and obviously broad market liquidity) and this is traded primarily on the thirty minute time frame. The EPIC Oil Algorithm Model specifically is what I am referring to. This model provides a working structure for mechanically executed trades and our machine trading.
Our software uses the one minute model structure for specific entry, exit and sizing on the lowest time frames but is using the 30 minute model as the basis or structure of trade. This allows for sizing progression in the trade as it proves out. More specifically it allows for a test size and then progressive sizing and releasing of size through the structured trade.
This is critical to return and defined minimal risk.
And lastly, all the other time frames (up to the monthly charting structure) are considered in an order of probability for support and resistance decisions.
This works, it provided for over 60% account build / returns in January and we expect that to increase to 100% if our team is right. We believe that as we further perfect this process that 100% or more is attainable and 50% is our minimum bar at this point. This is yet to be seen and we start Sunday night in futures trade specifically to this process.
Starting Sunday night our software will only trade the highest probability crude oil trading set-ups / strategies as it relates to the above noted 30 minute model referencing the one minute model for specific entry, exit and sizing points.
The frequency of trade will be 20 – 40 trades per week or about 6 trades per day. 20 – 60 ticks per day at an average of 5/10 sizing 20 days a month. The rate of return math on that scenario assuming a 10 contract account size (100 K account approximately) is as follows;
Average trade size = 5 contracts (sizing from 1 to 10 progressive).
Average winning range per day = 40 ticks (on 6 trades) at 80% win side. On surface this looks like only 7 – 10 ticks or so per trade, but this is actually the 7 – 10 tick core (or meat of the trade) that averages 5 contract size, the actual average trade range is larger.
Average daily wins = 2000.00 per day x 20 days per month.
Average monthly gain = 40%+ (we assume 50%+)
Remember, this is average, some days it will be none and some days 200 ticks. Structured trading is boring until it isn’t. Then it is anything but.
This methodology of oil trade provides for the highest probability to being on the win side of the trade (tested in practice), with the highest ROI because the trades are 10 – 100 ticks in range, with controlled stops (larger range structure provides for more predictable stops), with manageable order fills because a 3 – 6 tick divergence is not an issue when you are looking for an average 30 tick move and more.
Note: above I note a 40 tick per day average win rate and yet that we are looking for a 30 tick move in each trade, you have to consider that the trade sizing is from 1 to 10 and progressive on either side of the move.
Example Trade Sizing Progressively.
Below is a simple example, our software in a much more dynamic manner, but the example below provides a frame-work for discussion. The example below is also a real life typical example of a range from the even dollar to the half dollar (60.00 – 60.50) within the key area or core of liquidity and volatility on the day (typical going in to or at regular US market open, events such as EIA, and at key inflection points of intra-day trade).
Trade long 60.00 2 contract size based on structure support, timing, order flow.
Wait for retest of support and progressive order flow and price action.
Long 60.04 4 contract size. Hits next resistance, trade retests next support, price action moves to next leg.
Long 60.14 4 contract size. Hits next resistance.
Trim long 60.24 4 contracts.
Trim long 60.36 4 contracts.
Trim long 60.48 2 contracts.
In the above perfect intra day range trade example you have profit as follows;
2 contracts 24 ticks
2 contracts 20 ticks
2 contracts 32 ticks
2 contracts 22 ticks
2 contracts 34 ticks
Average contract win 35 ticks less volatility in fill slippage (market order) is lets say 30 ticks. That’s an excellent trade and these trade set-ups do occur most days in crude oil, however, not every set up will be executed to the set up because oil trade is not always perfect.
Above is a perfect scenario, below are reasons for the real – world average scenario to be less than a 30 tick winning range.
- Win Rate – If the win rate is 80% then one in five trades will not work, this has to be factored. Our win rate with the 30 minute structure is over 90% (documented, traded live, alerted, recorded), but lets assume 80% for argument. Lets assume your average stop loss is 12 or so ticks. That is a loss of 12 ticks every 5 trades and adds quick if your win rate is not 80% (hence the importance of only trading the most probable set-ups).
- Range of Average Trade – Not every trade has the 50 tick range assumed in the example above. A 50 tick move from 60.00 – 60.50 as in the example above does happen most days (in fact we often see 100 ticks or more), but you have to execute on those specific moves to see that.
- Failed Moves – Many of the trade set-ups will not work according to plan. It usually takes two or three attempts at a move before the market moves price through the whole move.
- Order Fills – There are many reasons for issues here, especially for manually executed market orders, you can assume 5 ticks per trade series (or more depending on your method).
To successfully trade crude oil intraday to a 2% account gain daily (the example we use above) requires that you catch the moves when they occur, that you trade within the most probable / defined structure and setups. And lets not forget that it also requires that you execute stops when the setup fails (fast).
Understanding the structure of intraday trade on the 30 minute model is key to catching the moves and knowing the most probable size of the move (support and resistance). The one minute model is key to your trade entry, sizing and exit.
Summary
So in short we went all the way down the rabbit hole, we tested every oil trading strategy we could find and we believe we’ve come out the other side with the most predictable, lowest risk, highest ROI oil trading structures available in the markets.
The next article will detail the oil trading strategies that are most predictable with the highest ROI as described above.
If you have any questions please feel free to email us at [email protected] anytime.
To access our services you will find our oil trade alerts are here, oil trading room here (bundled with alerts and newsletters) and oil trade reporting service here.
Thank you.
Curtis, Lead Trader Compound Trading Group
