Beware of uneven flaws.... (how not to trade oil!)

A few months ago I noticed that oil (symbolised by the US ETF: USO) was falling within a rising wedge. In the graph below, the floor of support is symbolised by an upwards sloping red line with two touch points (blue arrows). I theorised that this support line would be a good point at which to BUY oil. I decided to do an option trade, buying a call option . I bought an option dated a few months into the future, because I anticipated a reasonably quick turnaround, and planned to sell the option when the USO price hit $39.

The price of oil fell, of course.

2015 01 18 USO

(click on the graph to get a clear picture)

Mistake 1: I theorised that I simply had misinterpreted where the floor of support was, and that there would be more support at $29 where the price had bounced in 2011 and 2012 so I kept the option running. Bear in mind that the greatest change in option value occurs closest to the purchase price. So the value of my option had already dropped off exponentially. I should have closed the option as soon as the USO price dropped below my anticipated support level because my rationale behind the trade had just vanished.

Mistake 2: As the oil price continued to fall through by second (blue) fall of support, I still did not close the option, deciding instead that the floor of support would be at the $23 level where it had turned around in 2009 (purple line) after the 2008 collapse. My head was in the sand....

Mistake 3: I bought more USO at the $23 level, based on the thoughts above. However, I did not do an option trade, because I did not want to have a an expiration issue (options expire after a period of time), theorising that the price of USO would probably drop further, so just holding the ETF would allow me to ride out the down-turn, unlike the option trade.

Mistake 4 (or is it an opportunity?): At the end of this week, I see that the volume of USO trades has risen hugely (193million). Not quite at the level of Jan 2009 (209 million), but not far off it. I am tempted to buy more oil! Am I mad? I am tempted to do it as a leveraged trade to gain maximally from the rebound, buying the leveraged ETF (LOIL). Interestingly, the price of LOIL spiked massively last week, rising temporarily to over $2 and then dropping back. This may have had as much to do with the Swiss franc turmoil as with oil supply, I suspect. An advantage to buying LOIL rather than a call option is that I can hold it for as long as I wish, although leveraged ETFs have their price recalculated daily and are not always suitable for long-term trades. I suspect that LOIL is ideal for the current scenario.

This is definitely not trend trading!

Another trade that I have been looking at is going long (buying)the EUR/USD. The Euro has been falling against the dollar, and there has been an apparent floor of support (rising red line) that I thought would make the Euro bounce upwards. It didn't, as you can see.

2015 01 18 EUR USD

It fell through my first anticipated floor of support, and then a few weeks later fell through my second anticipated level of support. Fortunately I didn't trade it! This is the difficulty of trying to catch the bottom of a down-trending market.

Back to trend-trading. My trade this week is buying Fresnillo (LSE: FRES). Fresnillo are the world's largest silver miner.

2015 1 18 Fresnillo

  • Their share price has popped up through the weekly 50ma

  • The share price has made a new 60-day high

  • The 50ma is rising (only just!)

I will set my stop just below the Jan 14 low, then when the 50ma rises above the entry price I will use that as the trailing stop.

If you are interested in my thoughts on the markets this week, click here (6mins).

If you are interested in how my open positions are doing, click here (17 mins). There is a little extra bit of info in there about a very exciting trade that I have opened. You'll need to watch the video to catch it! (It's definitely not a trend trade!)


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