Today, between 4pm and 5pm there was a completely random move in Brent prices. Very typical of the trickiness of the oil market that perfectly illustrates how to be a successful trader (for medium-term/long-term trade): strong-conviction trades and forget the noises.
In a 2013-portrait of Pierre Andurand by Bloomberg, the journalist (Matthew Brown) a former colleague of Andurand:
“He may be the calmest risk taker I’ve seen,” “Oil is a relatively volatile financial product, so you have to see the sometimes violent daily swings as noise. He’s really good at putting on a position early and sitting through the volatility.”
Conviction is key when trading oil
- (1) Price Action
- (2) Why such volatility?
- (3) Oil Trader quality
(1) Price Action
14.12.2016 – Brent price moved from $55.18 to $55.78.
The market was not very volatile and was trending downward without a lot of conviction. 2 days after the OPEC deal and the huge spike to $57.61.
As stated in my current posts, I am short oil. This move triggered my stop-loss. My first thought was that new info was out but there was nothing. Market conditions were the same with a higher price. Regardless of my previous stop loss, I quickly reopened the position.
I was right on the trend and it moved downward afterwards ($54 bottom of the day). Almost gave up on my idea because of this move. Oil is subject to violent daily swings and there is a lot of noise
(2) Why such volatility?
- Lot of different people on the market with different interests
- Lot of spread trading between different benchmarks
- Lot of speculation (algorithms, hedge funds,..)
Oil = highly traded market with worldwide attention and history of huge swings –> volatil market
(3) Oil Trader quality
It is very important when trading oil on other time-frame than short-term to be able to keep a position open if the investment thesis hasn’t changed but price doesn’t go in your direction. As a result the size of your trades should not be too big because you have to always consider a worst-case scenario and to be able to sustain some volatility.