Tuesday, August 24, 2010

New Futures trade in RBOB

I have been pretty bearish on equities and oil related commodities for the past two weeks. The markets have seen a sizable pull with SPY testing 113 on 8/9 only to be rejected to trade lower, hitting an intra day low of 104.97, that is about a 7% move. The important level that people were watching for was the 104.5 to 105 level on the SPY. Once this level breaks the June low of 101.13 is game on. But today the market voted with its wallet and said it was not ready for this move just yet. I think the market has to digest this latest move before moving lower. The market is a bit oversold by my observation.

Trading in lockstep and even suffering steeper losses were Crude and RBOB. Crude has traded down 12 out of the last 14 sessions and RBOB down 12 of the last 15 sessions. Again I am sensing some overbought conditions. Although I remain bearish on most asset classes in the medium term, short term I am ready to take a low risk high reward trade to the upside in RBOB.

Being that I am playing a bit with fire, I am going to keep a tight stop on this one. In today's regular session RBOB traded as low as 1.8010 which in previous analysis I have identified as a potential support level due to the volume clustered around this price and the fact this level was supported in the last half of 2009. It is not a huge level, but I think coupled with the oversold conditions the setup looks good.

So today I bought 5 Oct RBOB contracts at 1.8145 and put in a GTC sell order at 1.7950 As you can see on the chart above I think there is a good chance that RBOB trades back up to around 1.885 where it gapped down from. I am risking 2cts to make 7cts. But the trade is not as simple as that.

In addition to the stop loss order I have out their I also placed another GTC order to sell 2 contracts at 183.50. At this point if these two contracts get taken I will move my stop up to break even on the remaining 3 contracts from 1.7950 to 1.8150. At the same time as moving up my stop loss to break even I will put in another order to sell the remaining 3 contracts at 1.8850.

Seeing as this contract trades in a multiple of 42,000 gallons per contract, if everything goes as planned I am looking to make a maximum $1,680 on the first two contracts and $8,820 on the other three for a total of $10,500. My risk is about 2cts a contract for a max loss of $4,200.

Risk/Reward :    1/2.5


  1. So this morning I was stopped out of this position for a 2ct loss on 5 contracts. The durable goods number came in way worse then expected, and on top of that the DOE released yet another bearish report. But I would had made the same trade again. I liked the setup and I defined my risk.

    If anything it was a great exercise of risk managment and discipline. I was more disciplined on this trade than probably any trade I have ever done in my own trading account. I had a stop loss set, I had an order out there to take some patial profits and a plan to move up my stop to breakeven.

    You will not always be in a position of strength when initiating the next trade and/or making the call to stick with you plan to cut a trade. What is important is that you keep you discipline and live to trade another day.

  2. Do you feel you were more disciplined on this trade than your personal ones because it's not your capital? I've never been in that position but I suspect I would have a similar experience as we both have enough ethics to not gamble with other people's money. This is probably good as you'll feel obligated to do more than your due diligence in trade set ups, hopefully that spills over in to your personal trading as well.

    Losing trades are going to happen. If you're happy with your initial set up and mgmt of that trade afterwards, then the rest to me is just statistics that will all get washed out in the long run. Practice just what you've mentioned here is what's important. Of course in the end the only thing that is important is profitability, but following these rules should help keep you profitable.

  3. I sure do think that my discipline levels have to do with the fact that I am playing with someone elses money.

    You are right in the end profitability is what matters. Like you mentioned losing trades are going to happen but this is only one trade.

    Pat was estatic that I was using stop losses we are down a good amount of money on a house hedge/trade due to lack of a plan and or stop. He calls these HP trades (hope and prey), which he wants to move away from.