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A Trade Setup in Oil Futures!

On Friday, May 29th, we traded oil in the long side based on two key elements:

  1. Larger timeframe context - support & resistance levels and,

  2. Intraday value area confirmation.

CL_F 4H Chart

Word of caution: if you don't start your trading with an analysis of the larger timeframe, you are prone to missing out on the context of the market 9 out of 10 times. That is why, step #1 is always: the top-down approach in identifying key s&r levels on the chart.

We were tracking the 36.50 resistance for over a month and we are currently close to that mark. Oil has the potential to even fill the gap and rally up to 40.80 resistance. Understanding that the larger timeframe requires higher prices, we scaled down to the intraday chart to review value for:

  1. the prior session - Thursday, May 28th and,

  2. the current session - Friday, May 29th.

CL_F 5 Minute Chart - VWAP Value Area Zones

On Friday morning, our to-do list was the following:

  1. Plot yesterday's value area zones on the chart, such as yesterday's value area high (Y.VAH), yesterday's value area low (Y.VAL), and yesterday's VWAP (Y. VWAP).

  2. Observe the price action for a retest of Y.VWAP or Y.VAL and buy only if the market trades above Y.VWAP and spends time over this level (32.76).

Oil started off with the Asian hours trading lower from Y.VAH to Y.VWAP and didn't retest Y.VAL which was a sign of strength. Most of the European session was a balanced market, however, price managed to crawl back above Y.VWAP and also tried to trade above Developing Value Area high at 33.40/50. This was a sign for us to try a long position and we opened a buy at 33.55 with stop below Y.VWAP at 32.75 and target area new highs.

Only during the US lunch time, the buyers managed to break strongly above Y.VAH and provide us an imbalanced (trending) market with a push towards +2/+2.5 standard deviation from VWAP, which for us is a sign to take profits. Why take profits there and not hold for 36.50?

  1. Because profit is a profit and scaling out is better than holding your entire position for 1 target;

  2. Because market never spends too much time trading at or above +2/+2.5 from VWAP without necessary pullbacks in price and time - read our article here.

To recap,

  1. Understand context from larger timeframes;

  2. Review value or find levels from the prior session;

  3. Wait for confirmation on your bias or main hypo;

  4. Execute;

  5. Take partial profits - increase stop loss.

If you want to discuss your trading skills, strategy, risk management or anything else then book a free session with one of our experienced traders here!

Until next time, be a mindful trader.


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