I wry rarely speculate in commodities, because like all zero sum games you have to have a very fat advantage to have a solid chance of making consistent profits.
The only market that I’m confident is a positive sum game is equities and I’m happy to stick with them accordingly.
Commodities could be a positive sum game, because in a way there are always more being produced and taking risk between makers and users might be worth an honest rent, but deep down I think to win trading commodities, someone has to lose. Then the broker takes his cut rendering the operation a negative sum that must be lost in the long run.
However we all have our favorite trading set ups and right now oil is in one of mine.
This setup is a technical chart where a tight trading range has formed for an instrument that has fallen or risen far.
This range is created by a drop of volatility combined with a equilibrium point for the price so gthat consequential the instrument ends up going nowhere. The price simply plods along without much change along a narrow channel.
In my trading book, this equilibrium is a preview to a sharp move.
The tight range means there is little risk of getting whipsawed by volatility, which is a good time to consider a position but you do not even have to jump in early to get the benefit of this setup.
Its one thing having an opinion, its another simply to feel comfortable with jumping on a new trend you expect to be long.
The market tells you about the direction. All you need is to jump on board.
Here is an example of the Nikkei just before Abenomics kicked off. You can imagine Japanese traders waiting for the starting pistol. You can see it in the chart.
(Nikkei chart)
This is the set up we are looking for.
Now here it is in Oil.
While a break down would give a signal of a fat fall and break out would be quite spectacular on the upside.
(Oil chart.)
It looks bullish to me, but it’s the direction of the breakout that gives the direction for the trade. It can’t keep going sideways, so at some point the oil chart with give a clear signal which way to go. So keep an eye on Oil because there are all sorts of trades in addition to being long the future, that can make you money when Oil starts to motor.