Daily Return Expectation Analysis: Crude Oil
Traders who are new to the futures markets often find themselves trading with limited knowledge of true price risk. Traders enter new positions with all the optimism in the world, yet sometimes the markets have a different and very opposite outlook. During these times, optimism can quickly turn into despair. The reality is that price reversals occur all the time, and an informed trader should always be prepared for these reversals.
The first step is to have realistic expectations. Traders need to know:
- What is the biggest move made by the market
- What is the markets’s average magnitude for big moves
- How do these returns vary by month
A trader armed with this information will be better prepared to handle the markets from both an emotional and a capital management perspective.
Expectation Overview
The expectation chart below analyzes daily moves for the market based on a monthly breakdown. The yellow circle represents the biggest one day percentage move for each month over the past 15 years. The dashed line beneath the yellow circle measures the average highs during the month. A trader should expect the possibility of a daily high reaching the dashed line average and plan for the potential of reaching the yellow circle high. On the flip side, the gray box on the expectation chart, represents the biggest daily percentage low for the month. The dashed line above the gray box signifies the monthly average low return.
If trading capital can’t handle posted percentage moves, then the market should not be traded. It should be noted that while protective stops might mitigate a traders risk, they are in no way a guarantee against run away markets. Whether trading from the long or short side, traders need to prepare for the worst-case scenarios.
Daily Return Expectation Analysis: Crude Oil
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