Shain Vernier is a full-time trader betting primarily on crude oil, gold and currencies. The core of its strategy is to avoid speculation on market direction or price predictions. His approach is to get in and out quickly.
When he's not trading, he's an online coach teaching others how to use technical analysis at HowToTrade.com. In a previous interview with Business Insider, he explained one of his main strategies: using the Fibonacci retracement tool to trade on price volatility.
In this interview, he explained another strategy he uses when trading crude oil futures contracts through the CME's West Texas Intermediate (WTI) contract, which gives the buyer the right to “theoretically” take delivery of shares on the expiration date of the to receive the contract. Unlike a company stock, which is influenced by fundamentals, a commodity goes through boom and bust cycles based on supply and demand, creating a certain cyclical predictability that provides the opportunity to trade the same on a monthly, weekly, and even daily basis to do.
To do this, Vernier tracks the highest and lowest prices for the front-month futures contract it trades (the closest expiring contract that typically has the highest volume) every month, every week, and every day, as this creates key levels that all dealers can see. These levels typically cause orders to flow in the market, he noted. Its goal is to place a stop-limit buy order on a contract that is slightly above a previous high. For example, if last week's high was $80.85, his order would be placed for $80.86. It is based on the assumption that when the price starts to rise, it attracts more traders into the market and strengthens the price movement.
There are many reasons why traders continue to buy at high prices, but one main theory is that when the price breaks above a previous high, it attracts short sellers, traders who borrow a security to sell it and sell it later Buying it back at a lower price means you can pocket the difference. However, when a security is perceived to be overvalued, the short side of a trade can become crowded, resulting in a short squeeze in which traders begin buying back the security to cover their positions. The increase in purchases drives up the price. Vernier is benefiting from this small price increase, he said.
Vernier avoids placing a buy order below a previous high because he assumes that there will be many sellers once the price falls back to that high and he does not want to risk riding out a price decline.
For example, on February 28, he bought five contracts on CME Group West Texas Intermediate (WTI) for April (CLJ4) after it broke above the January peak of $79.09. He set his buy order at $79.10 with an allowed slippage of 2 ticks ($0.02), anticipating that trading volume would increase as traders joined the bids and short sellers began betting against it. Its stop loss was below the previous 5-minute price level at $78.79. His original profit target was $79.40, but since he was trading at 9:00 a.m. ET, a time when market participation for the oil market can increase and create unpredictable conditions, he sold earlier at $79.24 .
The following graphic is a picture of Vernier's trade.
TradingView
To mitigate his risk, he keeps his profit expectations very low, aiming for a profit of a few cents, or about $0.08 to $0.10. This keeps his exposure short, lowers his risk and increases his win rate. The average hold time for this strategy can often range from 20 seconds to a minute, he said. Since these are really fast trades, everything is done via bracket orders, which means that the buy orders and stop-loss orders are set up together once its entry points are set.
To further reduce risk, he only trades 1 to 3% of his portfolio. For example, if his brokerage account has a brokerage balance of $1,000, he will trade at $30.
The advantage of this strategy is that it allows for predictable trading that he can make monthly, weekly and sometimes daily. He emphasized that trading at the previous day's high was riskier compared to the monthly high due to the short time frame observed over a longer period of time. He told Business Insider that he has a 90% win rate at key monthly levels. Weekly his win rate drops to 75-80% and daily to around 60-70%. He emphasized that he is able to keep his odds high because he practices scalping, which means he makes a small, quick profit. Traders seeking higher profits increase their risk and reduce their chances of winning.
However, there are certain cases where he avoids making a trade. The first case occurs when there is a high volume of contract renewals. This is when traders begin to close out a contract cycle and trade the next month's contracts, resulting in volume dilution and inconsistent price action, he noted. He also avoids trading oil contracts when there are headlines about geopolitical instability or an outbreak of war because they create uncertainty.
Two other key market drivers he doesn't want to trade near are the U.S. oil supply reports (not counting holidays) released Tuesday by the American Petroleum Institute and Wednesday by the Energy Information Administration. They bring more participation into the market and create too much volatility and unpredictability.
Comments are closed.