Oil trading: swimming with whales

This is another article I like, particularly the part on using whales as an analogy. Reckon it will get lost in my computer somehow so decided to keep in this blog.

Published March 7, 2011

COMMODITIES
Oil trading: swimming with whales

By TIMOTHY MORGE

EVERYONE is talking about oil now: Will oil stay above US$100 a barrel? Should I buy oil here? Should I sell it?

As a successful commodities speculator for the past four decades, I've had to perfect my tools and my approach to trading the markets. The market is a living, breathing thing, and the rhythm is created by the people with the most money and the largest positions in a given market: the 'whales'. Following a consistent method to identify the proper entry and exit points in a market is critical to successful trading. I never chase the markets; instead, I use my tools to identify where the 'whales' are feeding and then look for potential entries there.

Oil began to trend higher in February 2009 - and I began to buy oil for my portfolio at US$35 a barrel, at an area that had acted as resistance for decades - until oil prices ignited in mid-2004 (what had been resistance should act as support).

The technical analysis tools I have developed and mastered over the past 40 years allowed me to identify the probable path of oil and then plan trades in the Nymex WTI light sweet crude oil futures. By July 2009, everyone was talking about oil going to US$100 a barrel. The majority of the market participants got ahead of themselves and entered long positions with poor trade location.

'Whales' are loners - if they feel oil is going up in the long term, they don't want to have everyone along for the ride with them. They want the majority of the market participants continually 'chasing the market'. This allows them to hand off their positions to the trading public when price gets ahead of itself, as it did in May 2010. Oil sold off hard as many stop-profit and stop-loss orders were executed. But it sold off to an area where the 'whales' were willing to buy: at the confluence point of multiple prior lows.

I had been stalking this confluence point for a long entry but passed on the trade because it did not fit all of my defined trading rules. But when oil prices broke above several swing highs, I began working a 'limit buy' order. I eventually got long at US$71.35 with a tight stop below prior multiple lows; I currently have a profit target of US$114 a barrel on a portion of my position.

I would consider adding to my current long positions (at US$35 and US$71 a barrel) if price fills the open gap just below US$88 a barrel, with a stop-loss order below the prior swing low.

The trading public often feels the market is after them, trying to discourage them at every turn. Having a set trading methodology, trading rules, strict money management, a plan, and the discipline to follow all of these, is critical.

The market gets the majority of the smaller and medium-sized players excited and bullish just before it turns down. Then it turns back up right after they give up and turn bearish. The market breathes and the 'whales' take advantage of the whims of the majority of traders. My methodology is designed to identify the behaviour of the major participants (the 'whales'), so I can trade along with them.

The writer is a CME member and independent trader. He actively trades CME Group products and teaches his trading methodology at www.marketgeometry.com