Crude Oil futures have been on a steady rise over the past 12 trading days, moving from $32 to just over $38 per barrel . If you were a buyer this period, it’s been a very nice ride. Will Crude Oil continue to rise, or is a reversal imminent? There are pundits on both sides of that question.
Unless it’s a holiday week, Crude Oil Inventory Reports are usually released at 10:30am EDT. When the reports are released, it’s not uncommon to see a significant reaction to the price of Crude Oil Futures after the news is released. Due to the whippy nature of the Crude Oil futures markets, it is very important to have a good trading strategy for this market.
On Wednesday, March 9, Crude Oil was trading around 37.20 before the release of the Crude Oil News. The plan was to wait for the news release and buy or sell a Nadex Spread once the reaction to the news was confirmed.
When the news was released, Crude Oil Futures spiked from 37.20 up to 37.70 within the first 2 minutes. That’s a quick, 50 tick move to the upside. Would the uptrend continue, or was this a short-term “head fake”? The market then pulled back for 2 bars. As soon as the market continued on its up trend, the following Nadex Spread trade was placed:
10:34am BUY Crude Oil 33.50 – 38.50 (2:30 Expiry) This is a 500 tick spread. Every tick is worth $1.00, per contract
Entry Price: 37.42 This was the Entry Point to BUY
Maximum Risk: $392, per contract This is the difference between the Floor of the Spread (33.50) and the Entry (BUY) Price (37.42)
Maximum Reward $108, per contract This is the difference between the Ceiling of the Spread (38.560) and the Entry BUY Price (37.42)
Number of Contracts Traded: 10 Contracts. Max Risk: $3,920, Max Reward: $1,080
Profit Target: 50 Ticks, or $50, per contract = $500
Stop/Loss Target: 25 Ticks, or $25. per contract = (-$250)
Crude Oil Futures moved upward for 20 minutes, picking up over 30 ticks, before reversing back to break-even. After that, the market moved straight up. At 11:33 the 50-tick profit target was reached, and the trade was exited for a $510 profit, or a 13% return on capital risked in less than one hour (exchange fees not included).
Trading spreads can produce profits over a short period of time, but you must be disciplined and honor your stop/loss if the market moves against you. Crude is very volatile, so you must be prepared to exit if the market hits your stop/loss target. It is also okay to capture profits before your take profit goal is reached. It 20-40 ticks were available, and the market started to stall or show signs of reversal, it’s okay to bank profits.