The crude oil market can be quite volatile and therefore painful to trade if you don’t have a sound risk-management strategy. However, with volatility also comes opportunity, and day trading crude oil can be both fun and profitable when you’re on the right side of the market and have a solid plan in place. Since the launch of the Globex (electronic) crude oil contract, this market has been a favorite of many for day trading, and there’s even a mini contract if the larger contract is priced out of reach. There are many different strategies one can use to day trade crude oil futures. My personal favorite is using the MACD (Moving Average Convergence/Divergence) on a five-minute chart.
The MACD is a technical indicator created by Gerald Appel in the 1960’s. It is a trend following momentum indicator that shows the difference between a fast and slow exponential moving average (EMA) of closing prices. When using this study there are two moving average lines on the chart. One line, typically blue, is the MACD. The MACD line equals the 12-period EMA minus the 26-period EMA. Another line, which is generally red, is the signal line. The signal line is the nine-period EMA.
The signal line acts as a “trigger” to pinpoint when you’d want to buy or sell. As shown in the chart below, when the MACD falls below the signal line, it is a bearish sign, which indicates that it may be time to sell. On the other hand, when the MACD rises above the signal line, the indicator gives a bullish signal, which indicates upward momentum should follow.
I favor this approach for trading crude oil because of the volatility in this market. It’s a great tool that allows traders to be nimble, and helps determine when to reverse your position. In a less volatile market, you are more likely to get “whipsawed” and not be able to execute your strategy properly. This strategy can be applied to longer-term trades but you’d want to use a daily chart, rather than the five-minute chart that I recommend for day trading. You certainly want to use stops when you trade, and can place them at levels appropriate to your own personal risk tolerance. Ideally, you would want to hold your position until you get a sell signal when you are long, or a buy signal when you are short. At that time, you’d then reverse your position. If you aren’t comfortable trading this market, working with a professional can help you determine an appropriate risk-management strategy and trading approach.
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