Introduction

Many forex traders will tend to focus all of their attention on the major forex pairs, such as the GBP/USD, EUR/USD and USD/JPY pairs, for example, but the oil markets can be just as profitable, if not more so, when day trading.

That’s because you can often get 200-300 point swings in a day, and there is generally lots of volatility during the London and New York trading sessions, which makes it easy to find one or two high quality set-ups.

One such set-up presented itself yesterday on US crude oil yesterday (19 May 2023), as I will now discuss in more detail.

Previous Price Action

Going in to Friday, I knew that Thursday had been an inside bar on the daily chart of US crude. Therefore I was expecting Friday to potentially be a more volatile day with a wider trading range.

My bias was towards the downside because I was looking for the price to break below the Thursday low of this inside bar, and make a sustained move downwards to erase some of the upward momentum of Monday and Wednesday.

Early Morning Price Action

The low of the inside bar was $71.54, so this was the key level that I was looking at, but as you can see from the shaded rectangle that I drew on the chart, the price was trading in a narrow range during this time and was nowhere near this key level. Therefore a breakout was looking unlikely at this stage.

The price did break out of this channel at around 9.15 AM (London time) but was still around 70 points short of this key level even at the low. So it wasn’t really worth trading the breakout at this time.

Failed Breakout

This attempted breakout ultimately failed, and the price came back into the early morning trading range, before breaking upwards outside the high of this range.

When this happens, you have to accept that your bias towards the downside may be wrong, and it may be worth considering trading an upward breakout of the inside bar instead (which stood at $72.96).

Weekly Resistance and Inside Bar Breakout

Looking at the daily chart, I was aware that there was very strong resistance around the $73 level from Wednesday and Thursday, and indeed from previous days earlier in the month, and this was reflected in the price action because the upward momentum started to stall as it got towards this level.

I knew that we could get an attempted breakout into higher ground if we could stay within 20 or 30 points of this key level, and so when the large red candle on the 5 minute chart failed to result in a pullback, and instead started to trade in a very narrow range, it was time to sit up and take notice.

Taking the Trade

I have talked about 5-minute momentum trades on this site before, and how they can be very profitable in the right trading conditions, and this looked like being one of them.

The 10 and 20-period EMAs were now very close to each other on the 5-minute chart and this new trading range was sitting right on the high of the previous trading range.

It was just a case of watching the price action and waiting for a strong green bullish candle breaking upwards outside of this very narrow range.

Here is a zoomed in view of what happened…

After two inside bars followed by a green breakout candle, I took a long position on the close of this candle at 72.87 with a stop under the previous candle low of 72.73.

My stop was therefore 14 points, and I was hoping for a profit of at least 2 times my risk, ie 28 points.

In the end I closed out my entire position at 73.25 for a profit of 38 points and a risk/reward trade of around 2.7 after I had moved my stop loss up to this level and was stopped out, which I was more than happy with.

I was hoping that the upward momentum would continue for a much bigger move, but even after I was stopped out, the price only reached a high of 73.56 and the breakout quickly fizzled out and reversed sharply later in the day as longer term traders banked their profits from previous longs earlier in the week.

Final Thoughts

The point of this article was not to brag about having a profitable trade on US crude oil yesterday (I have just as many losing trades as winning trades, just like most traders), but merely to walk you through my thought process regarding this potential set-up, and to demomnstrate the profit potential of these momentum trades from tight trading ranges on the 5-minute chart.

These high probability set-ups don’t come around that often each day, but you need to keep an eye out for them because they can be fairly profitable when they do come along, and because the price is breaking out of a narrow range, you can keep your stop losses small and go for bigger wins of 2 or 3 times your risk, which are the trades that we all want to find.

Recent Breakout

At the start of this month, I highlighted the price breakout that had occurred on the daily chart of WTI Crude, and suggested that the price may well continue moving up towards the $30 level.

If you follow the oil markets, you probably already know the outcome, but in this article I thought I would provide a quick update to show you what has happened since that time.

This was how the price chart looked when I wrote my last blog post:

And this is how the price has moved since that original inside bar breakout:

As you can see, this has turned out to be a very positive breakout trade for those who decided to take it because not only did the price move up to the $30 level, but it actually broke straight through this level, which would ordinarily provide some resistance because it’s a significant round number, and was trading above $34 a short while ago.

Inside Bar Breakout #2

If you didn’t manage to take this trade, the market provided you with a second opportunity to ride this upward trend because there was actually a second inside bar breakout that occurred shortly after the first one.

Zooming in to the recent price action, you can see that after the initial price breakout, there was a fairly large red candle followed by five consecutive inside bars where the price traded within the range of the initial set-up bar, indicated by the two lines.

This was basically telling you that there was a period of indecision after the initial breakout, but when the price broke above, and crucially closed above the upper line on 14 May, traders immediately jumped on board with new long positions and drove the price higher to its recent highs.

The breakout candle closed at around $28, so this would potentially have offered a gain of more than $6, or 20% for those people who traded this second inside bar breakout.

Closing Comments

The point of this article is not to brag about how I called this breakout correctly because I am definitely not in a position to do that. I am not an oil trader myself and didn’t actually take a position on it.

I just wanted to re-emphasise how effective inside bar breakouts can be, regardless of which markets you prefer to trade.

If you can find a price chart where you have a large set-up bar / candle and several consecutive bars / candles that all trade within the range of this initial bar, the odds of success are very high when the price does eventually break out of this narrow trading range.

This is particularly true on the longer time frames because if you take the daily chart, for example, 5-10 consecutive inside bars represents 1-2 weeks of consolidation and indecision, which is a long time in the trading world.

Therefore any resulting price breakout is likely to generate a lot of interest and will often have a lot of volume and momentum behind it when it eventually occurs.

Price Action

If you have been watching the price of oil in recent weeks and months, you will know that it has been on a crazy ride just recently.

Indeed there was a brief time when the oil price actually went negative when the latest contract expired, which was an unprecedented event that has never happened before.

The price had already tumbled as a result of tensions between Saudi Arabia and Russia, followed by the sharp drop-off in demand caused by global lockdowns, but the constant shorting of oil pushed the spot price of WTI Crude Oil down to just $7 per barrel.

Breakout

As countries have started to reopen for business, the price of WTI Crude has started to slowly rise again, and in this article I want to highlight a breakout that occurred last week that you may have missed.

Inside bar breakouts are some of the most profitable breakouts you can trade if you wait for the right set-ups, and this was a decent example of a high probability set-up.

As you can see, there was initially a large red candle on 21 April 2020, but for the next ten trading sessions, the price of WTI Crude actually stayed within the entire range of this candle. So in other words, there were ten consecutive inside bars.

When this happens, there is often a strong breakout when the price finally breaks out of the range of this inside bar (and closes outside it), and that’s exactly what happened here.

On 4 May 2020, the price broke upwards out of this range and closed at almost exactly $23.

This would have been a good point to enter a long position because the price then went up to $27.15 the following day, representing a potential gain of $4.15.

Since then the price has dropped back to around the $25 mark, but I think many traders are expecting the momentum of this breakout to continue, with the price heading up towards the $30 level at some point.

Final Thoughts

I didn’t actually take this trade myself because I don’t like to trade oil on eToro (my risk score is high enough already thanks to my BP and RDSB stock holdings), but I just wanted to highlight how profitable these inside bar breakouts can be.

Just having two consecutive inside bars can be enough to give you a strong breakout trading opportunity, but it is often the case that your odds of success increase even more when you have several of these inside bars within the range of the initial candle.

That’s why I wanted to demonstrate with this example because here we had ten inside bar candles in a row, thanks to the extraordinarily large set-up candle that spooked the markets and prompted so many headlines.

It’s interesting to note that if you go back to the price chart and look at the price action before this large drop-off, you will see that there was a downward inside bar breakout just prior to this as well.

This would have got you into a short position at around $26.60, just before the big fall of nearly $20, but we can all be wise after the event, and in reality, many traders would probably have banked their profits before the price collapsed from $22 to $7.

The point is that you want to keep an eye out for these inside bar set-ups. They work really well on the longer time frames in particular, and when they occur at a peak or a trough, the resulting breakouts can potentially be large enough to give you some good gains.