Trading Oil II: Intraday Price Action Strategy

What time frames will we use?

For intraday oil trading, the following timeframes can be used:

• H1 - hourly frame is used to identify key support and resistance.
• 15 min or possibly 5 min - will be used to determine the time to enter the trade.

The trade idea is based on supports and resistances determined by the high and low of the previous days. Gaps will serve as an important indicator of signal confirmation on the 15 min or 5 min chart. The price of oil must at least touch the area in question (ideally cross it slightly and then return to the established area within a few minutes).

We will only trade the first test of the given area. If resistance breaks, it becomes support. The new support will only be valid for the first test. If support breaks, it becomes resistance and this resistance will also only be valid until the first test.

In chart #1 we have WTI crude oil on the hourly chart. The different daily sessions of WTI crude oil are separated by a vertical line. For each day, the daily high and low are shown by a horizontal line. Once the first test has occurred, this line is terminated. The test is performed on a set of 10 trading days.

_{WTI crude oil price on an hourly timeframe}

According to these rules, we identified 5 signals:

1. Day 2: Here is a long signal after the oil price reached the low of the previous day.

2. Day 3: Here is a short signal when the support from the previous day has been broken, so it has become resistance. A short signal was created when this resistance was returned to.

3. Day 7: Here we have two signals. The long signal was formed when the resistance from the previous day was broken and the price returned to this newly formed support. The short signal was formed when resistance was reached, which is the top of day #2 and also of day #1.

4. Day #9: Here is a long signal that was formed when the price returned to the support that was formed from the broken resistance at the previous day's high.

5. Day #10: Here is a long signal that was formed after the price reached the low from day #8. Price also broke the low from day #7, but as we will see below, the signal was not confirmed at this point.

Break down of individual trades on a 5 min chart

Only enter a trade if a gap forms at a given support or resistance, confirming the expected bounce from that zone. Trade entry was always at the upper edge of a bullish gap or the lower edge of a bearish gap. Therefore, the price had to make an inevitable return to the given gaps. The stop loss is below the low formation in the case of a long trade and above the high formation in the case of a short trade. Profit is directed towards the high or low of the session or the identified support or resistance from the H1 chart.

In the case of a trade on day 2, the maximum profit would be approximately 3R when speculating to the high of that day. Thus, if the unit of risk is 1%, then the possible profit would be 3%.
 

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_{A long trade on the 5 min chart of WTI crude oil that was executed on the 2nd test day}

In the case of a trade on day 3, when the short signal was generated, to the nearest support, which is the low of that trading session, the trade would have a potential of approximately 1 R, i.e. a profit of 1%.
 

_{A short trade on the 5 min chart that was executed on the 3rd test day}

On day 7, we got two signals. A long signal would reach the nearest resistance, which is the high from day 2. A short trade would reach a 2R profit if the profit was also directed to the low of this trading session. So in total, this day would have yielded 4%.
 

_{Long and short trade on the 5 min chart executed on the 7th test day}

On day 9, the trade would fail and a stop loss would be hit. We would have to accept a 1% loss.
 

_{Long trade on the 5 min chart executed on the 9th test day}

This trade would also profit at least 1R when speculating to the high of the trading session. The problem is that the trade would have ended with a stop loss before reaching this target.

On day 10, speculating to the resistance that arose from the high of this trading session would be a gain of 2R.
 

_{A long trade on the 5 min chart executed on the 10th trading day}

Finally, let's take another look at how all the plotted risk/reward trades look on the H1 chart.

_{WTI crude oil on H1 chart with executed trades plotted}

To summarize, we had 6 trades in 10 days. 5 trades were profitable, one was a loss. If we set the risk/reward ratio for intraday trading at 1:1, and at the same time one unit of risk was 1%, then we would have had a total profit of 4% for this period. This ratio was achieved for all profitable trades. The maximum possible profit, if we speculated with a profit to the nearest swing, would have been approximately 9R, i.e. 9 percent over this period with a unit of risk of 1 percent.

Before you start intraday oil trading:

Watch out for strong trends

First of all, you should note that in the case of strong uptrends, it is risky to speculate on the previous day's high on a decline in the price of oil. The same is true when there are strong downtrends, where, on the other hand, it is risky to speculate long at a touch of the previous day's support. You should therefore preferably trade those trades that are in the direction of the trend.

Less is sometimes more

In the article, we used supports and resistances based on the high and low of the previous days. Of course, other options can be used, such as the high and low of the previous week, the previous month, pivots, Fibonacci levels, etc. The problem is that if there are too many of these supports and resistances, then ultimately the trader may feel overstimulated. Less is therefore sometimes more.

Follow the fundamentals

Because oil can be very volatile when news is published, you should always check the calendar for that trading day. In particular, major economic news and/or information on oil inventories, etc. have a great potential to move the price of oil significantly within a few minutes or hours.

This method is not for complete beginners

Finally, we would like to make a note of the psychology of intraday trading. As you have noticed, the signals according to the established rules did not occur to us every day, but they occur irregularly. This tends to be a severe test of a trader's psychological resilience. On the one hand, the trader wants to trade every day, on the other hand, the expected signal may not arise on a given day.

The fact that the signal occurs on the day the trader expects it and at the price level is essentially a coincidence. This can be partially addressed by having, for example, two intraday strategies that the trader combines. In any case, intraday trading is one of the more challenging styles and therefore this trading method is not for complete beginners.

The advantage of intraday oil trading:

High accuracy

Price action methods using gaps to confirm trades in intraday trading are particularly popular because they can determine with relative accuracy when the price will move in the expected direction. This confirmation method can be used at any horizontal support and resistance.
 

Slower pace

If you set up an alert in your platform that triggers when a given support or resistance is reached, you know that you still have plenty of time (in our case at least 15 min) before a confirmation to trade occurs on the 5 min charts. So there is no reason to panic and make the rash decisions that so often cause traders harm.
 

Accurate stop loss and entry determination

Confirmation in the form of gaps accurately determines the price level at which a trade can be entered and also sets the level for the stop loss.

 

Don't miss the previous article about oil trading