Archives for May 2020

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.