The Forex Chronicles

Multi-Timeframe and Divergence Oil Trade – 7 December 2023

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Introduction

I’ve been asked several times to document some trades that are based on multi-timeframe analysis because people seem to really resonate with this particular trading strategy, so in today’s article I want to discuss a very nice set-up that occurred on US crude oil yesterday afternoon.

With multi-timeframe analysis I like the weekly, daily and 4-hour charts to be trending in the same direction, with the price ideally above or below their 10 and 20-period moving averages on each one.

Then I want to see a pullback on the 1-hour chart followed by a trend resumption in alignment with the three longer term charts, which is where I will enter a position.

US Crude Oil Set-Up

In the case of US crude oil, the price has been trending downwards on the weekly and daily chart for a while now, and was showing a little more strength on the 4-hour chart. However it was still trading below my preferred moving averages (the 10 and 20 EMA) on this timeframe too, as you can see below:

This is exactly what I was hoping to see, and it was actually perfectly set-up for a 1-hour pull-back and entry on Wednesday, but I was reluctant to trade on that day because the crude oil inventories figure was due to be released later in the afternoon, and could have had a positive or a negative effect on the trade.

As it turned out, this would have been a very profitable trade as it moved strongly downwards prior to the data release, but luckily there was another nice set-up on Thursday where the price resumed its downward trend after a brief pullback.

Trade Entry

As you can see, there were actually two potential set-ups earlier in the day, at the close of the 5.00 and 11.00 candles, but these were low probability trades because they occurred during the quietest periods of the day when volume for US crude oil is very light. So there was unlikely to be any strong momentum behind any downward move even if the trend were to continue.

The close of the highlighted 3PM candle was a much better set-up even though it was a little late in the day because it was a bigger downward candle and there was a lot more volume behind the price drop because it occurred in the first few hours of the US session.

Furthermore, if you look at the stochastics indicator in the bottom panel of the chart, you will see that there was a nice double top divergence pattern that showed that this upward price move was running out of momentum. Plus it also dropped below the black VWAP indicator as well to give a very strong signal.

If you had entered a short position at the close of the 3 PM candle (at 4 PM) at 69.927, you would have watched it move against you initially, but then fall as low as 68.98, approximately 95 points in profit, before bouncing back slightly towards the end of the day.

Since then it has continued moving higher in the overnight Asian session, but that doesn’t really matter. It still gave you enough of a move to bank some nice profits, even if you closed half the position at 50 points and were stopped out at break-even with the other half, for example.

Final Thoughts

Hopefully I have now demonstrated that this multi-timeframe strategy works well on a variety of different instruments because I have now given trading examples of this strategy for oil, gold and the USD/JPY pair.

You do still need to be selective, as I highlighted above, because you don’t want to take an entry signal at the quieter periods of the day. If you have strong volume on your side and are trading in alignment with the prevailing trend on the higher time frames, your odds of success will be much higher.

Inside Bar Breakout Trade on US Crude Oil – 11 October 2023

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Trade Set-Up

The tragic events that took place in Gaza over the weekend unsurprisingly caused the price of oil to spike sharply upwards on Sunday evening and into the early hours of Monday morning.

However after hitting a high of $86.11, the price of US crude oil price subsequently dropped back, and much to the surprise of many oil traders, it did in fact trade sideways in a fairly subdued manner on Monday and Tuesday.

This set up an excellent trading opportunity for breakout traders because if you check out the daily chart below, you will see that there was a double inside bar set-up, with both bars trading within the range of Sunday’s bar, which is generally a high probability set-up:

Trade Execution

When you get a set-up like this, you can either wait for the price to break the high of Tuesday’s candle to go long, or wait for the price to break the low to go short.

For extra confirmation, you can wait for a breakout on a lower timeframe, followed by a retest and then a continuation breakout, but by doing this, you run the risk of missing the trade altogether if the price drives straight through the high or the low without pulling back to the entry level.

A lot depends on the pre-breakout price action. Ideally you want the price to consolidate near the breakout level for several candles, because then the price has the potential to move a lot further from the breakout level straight away, but this didn’t occur here.

Anyone taking the breakout on the 5-minute price chart, for example, would have noticed that there was a lot of choppy price action after the initial breakout, as well as a few price moves back above $84.00 that may have taken them out before the big drop lower occurred if they used a relatively tight stop loss on this lower timeframe.

That’s why it’s often better just to stick to the daily chart when trading inside bar breakouts, reduce your trade size and use wider stop losses instead.

If you had done that here, you could have entered a short position on the breakout, placed your stop loss at yesterday’s high and still banked an excellent profit based on a 1:1 risk reward, without having to worry about short-term volatility.

Indeed you wouldn’t have even seen this initial volatility on the daily chart if you were looking at the chart at the end of the day.

Closing Comments

I didn’t take this trade myself because I was away from my computer this afternoon, but I just wanted to discuss this set-up on US crude oil because you don’t see these double inside bars very often, particularly on a volatile market such as oil.

However they are always worth paying attention to because when the price does eventually break the high or the low of the most recent inside bar, you can get some very big price moves in the direction of the breakout, as was the case here with a price drop of over 180 points from the breakout level.

Opening Range Breakout on US Crude Oil – 14 June 2023

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Introduction

Opening range breakouts can be some of the easiest and most profitable trades to execute when you get some good set-ups, and today we had a textbook set-up on the US crude oil market.

I like to wake up and start scanning my charts around 7 AM UK time, and as we got closer to 8 AM, it was apparent that US crude had been trading in a very tight sideways range since around 6.15 and was poised to break out of this range, either upwards or downwards, once the London market opened.

With the price hovering just above the 10 and 20-period EMAs on the 5-minute chart, and bearing in mind that we were sitting right on yesterday’s high, I wanted to see a downwards break, and that’s exactly what happened:

Trade Execution

With this type of set-up, it is best to either enter a trade on the 1-minute chart or enter a position based on pure price action.

That’s because if you wait for the 5-minute breakout candle to close, you will often find that a large part of the move will have taken place already, and subsequently you will be entering too late.

I myself did the latter and entered a short position straight after the London market opened when I saw the price starting to tick down fast, getting in at 6973.7, ie $69.737.

I placed my stop loss at the high of the previous 5-minute candle at 6982.3, 8.6 points away, and I was initially planning to exit half the position at VWAP, approximately 18 points away and indicated by the thick black line on the chart, and then let the other half run in case the price blasted straight through it.

As you can see, the VWAP ended up acting as support as it so often does, and after closing half the position at VWAP, the price came right back up and nearly took me out at break-even.

However thankfully the price came back down and I eventually decided to close the other half out at VWAP once again when I had the chance because it wasn’t acting right.

So the total profit from this trade was around 18 points, representing a reward to risk of over 2 to 1, which I am always more than happy with.

After all, if you can find risk-reward trades of 1-2 (trades that return 2 points of profit for 1 point of risk), if they only work out 40% of the time, for example, you will still earn some decent profits in the long run.

Closing Comments

The main point I wanted to get across is that the opening few hours of the London trading session can be very profitable if you like to trade opening range breakouts.

The key is to find markets that have traded in a very narrow range leading up to the open because in the case of US crude, for example, we know from my last post that it trades in a range of around 236 points on average at the moment.

Therefore when it traded in a 30-point box from 6.15 to 8.00 AM UK time, something had to give. It was inevitable that we would see a breakout. All I had to do was be patient and jump on board when it eventually happened.

Of course there will be false breakouts from time to time, but when this occurs, the secondary breakout will often be the one that cancels out the initial loss and brings in the big money.

So always try to look out for sideways consolidations in otherwise volatile markets because the price is very unlikely to stay in this tight range for very long.

Crude Oil Intraday Set-Up – 19 May 2023

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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.

Oil Update – 24 May 2020

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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:

WTI Crude Breakout - 4 May 2020

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

Oil US Crude Daily Chart - 24 May 2020

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.

Oil Chart May 2020 Inside Bar Breakout 2

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.