Crude Oil Trading and The Power Indicator

Crude Oil Trading and The Power Indicator

The new power indicator can be used with other instruments also, including crude oil trading.  Crude oil trading has different characteristics than the ES because there is less liquidity and more volatility.  But that doesn’t mean that the same rules can not be used successfully trading crude oil.

This first chart is from July 5 at the open.  What is important to look at is the accumulation distribution indicator down in the lower pane.  Notice how the indicator 3 minutes after the open shows distribution.  Then at 0913 hours the indicator again began showing distribution extremely close to the high of the day.

Crude Oil Trading 7/05/17. Note the Distribution Indicator
Crude Oil Trading 7/05/17. Note the Distribution Indicator on the bottom pane.

This indicator is not a timing indicator.  It is showing what the current sentiment is, and after 0913 hours, it was clearly bearish.

Now lets look at the actual trade setup.  The trade setup is a short trend trade, which is setup when the price first trades to the blue counter trend zone and then retraces to the red intermediate zone.  The buy sell power indicator is very weak and can only register a 55% buy when the indicator zigzags.

Crude Oil Trading 7/05/17 Trend Trade Setup
Crude Oil Trading 7/05/17 Trend Trade Setup

Note how hard the selling was as price reached the blue zone.  That strength carries the market down another 20 ticks.  What is important to see here, besides the absolute strength, is what the indicator does in all 3 panes.  A sharp V pattern is formed, but it immediately stabilizes and goes sideways while showing dark red.  This is what you expect to see to take a market lower.  Remember this point for the exit to the trade and compare the two charts.  This will take the market sharply lower and it represents the smart money move of the day.   In about an hour the market is down 140 ticks.

Currency Chart

The last piece of this puzzle is the ZoneTraderPro currency tool.  The currency tool is a composite of several forex currencies that highly correlate to the CL market.  Doing the correlation is a time consuming process but worth the effort.  There is a different correlation solution for the ES.  You would not use the same values for the CL and the ES.

Crude Oil Currency Tool 7/05/17
Crude Oil Currency Tool 7/05/17

Note the slope of the indicator line from 0909 hours and how the indicator is setting up dark red going into the trend trade at 0931 hours.  The rest is a history and a great setup to learn and use.

Trade Exit

What did the chart look like an hour later.  Again the accumulation distribution tells us the market is accumulating.  Price will spend over an hour down here, but the smart money has moved from sellers to buyers.  Again the accumulation distribution indicator is not calling the low, it is just telling you what is happening.

Crude Oil Trading Exit
Crude Oil Trading Exit

What is calling the exit is again the buy sell pressure indicator.  Notice how when price is trading at $45.20 at 11:00 hours, the indicator is deep red and getting even redder.  A buyer was there taking every contract thrown at him as the market tests the low.  This is the opposite of what happened to get into the trade.   This is not an example of a long trade entry, it is an example of a trade exit.  This buyer could run out of contracts he wanted to cover and then the selling could take the price sharply lower.  The previous low was a long exhaustion trade, again signaling a bottom.

Crude Oil Currency Trade Exit
Crude Oil Currency Trade Exit

The currency chart goes dark green twice 25 minutes before the eventual exit.  That is very close to the eventual low at $45.20.  The entry was clearer than the exit.  But you can see how the indicator is showing how that it is divergently higher at 1100 hours.  Or if you took profit then, you didn’t have to sit through over 30 ticks of retracement. Also note the ZoneTraderPro buy patterns indicated at that low.

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