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Correlating Markets: Crude Oil, Miny Crude Oil, Heating Oil

Correlating Markets: Crude Oil, Miny Crude Oil, Heating Oil
April 26
03:29 2012

Here is a 15 minute chart snapshot of Light Sweet Crude Oil (Symbol: CL), Miny Light Sweet Crude Oil (Symbol: QM), and Heating Oil (Symbol: HO). All of these charts show  trading activity for Friday, March 30th, 2012. This chart includes several technical indicators:

  • 8 period simple moving average (blue line)
  • 20 period simple moving average (red line)
  • 200 period simple moving average (green line)
  • Bollinger Bands (purple lines)
  • Relative Strength Index (RSI) (dotted line)
  • Volume (dark blue bars)

The Walkthrough

Trading correlating market can be done very easily once traders gain some experience and a better understanding of patterns. This understanding can help the trader take advantage of opportunities that present themselves in the  market.

For example, if the trader were looking in the energy sector it would be fairly easy to find markets that trade in a similar fashion to each other. This example uses crude oil, miny crude oil, and heating oil as three markets that track each other and can be traded simultaneously when an opportunity presents itself.

In order for the trader to take advantage of these opportunities he or she will have to be quick in determining entry, exit, when the setup has failed or if the setup has worked.

Each of the charts above shows a period of sideways consolidation until a breakout happens making a new high and then pulling back to make a double bottom. After making a double bottom all three markets begin to trade sideways as the day comes to a close.

Markets correlate because they track each other’s progress and have a lot of fundamental principles that all the instruments in that particular sector will be affected by.

Trading similar markets, can grow the trader’s wealth in ways that trading one symbol could never do. Also, doing this helps the trader spread risk and avoid trading one symbol that may or may not have good follow-through on any particular day.

The opposite is also true, that if all three markets are trading in a way that the professional trader cannot understand, it would be best to avoid the whole sector.

No single symbol should be looked at as an individual but instead as a member of a larger group that will eventually follow the rest of the members in that group. It is very unlikely that a particular symbol will break ranks and trade in a different pattern or trend than the other leading instruments in that particular sector.

This practice of trading correlating markets should only be done by those traders who have enough skill to pay attention to all three markets, as these markets all trade similar in fashion but never exactly the same. Traders must learn to watch the entire game and not focus on one individual player.

The Lesson

Understanding that markets correlate can help the trader after they have acquired skill but doing this in the early stages of learning can be confusing, risky, and lead the trader to believe that they are not good at something that requires more experience.

In trading, operating at your competency level and never overreaching is very important. Failure to do so can result in catastrophic losses and even worse, destroy confidence that can sometimes never be built back again.

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