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RBOB Gasoline (/RB) Trading Plan for Dummies Carl LordRev. G [email protected]

Disclaimer: The author of this plan does not guarantee any profitable results and recommends trading in paper money (simulated trading) for a substantial period of time and show prolonged success with this strategy before trading with real money.

1. General:

RBOB Gasoline (reformulated gasoline blendstock for oxygen blending) (symbol RB or /RB) futures are traded on the New York Mercantile Exchange. RB trades in increments of 10,000ths. There are 10,000 ticks per point. Because of the small increments, it is typical there is a 4 to 6 tick bid/ask spread. So, orders are not always filled at the price you place the order or stop at. A breakeven trade would have a stop loss set 4 ticks above (for long) or below (for short) the entry price. A stop loss at 6 ticks would also cover the transaction costs.

One contract equals 1000 bbl (barrels) (42,000 U.S. gal).

1 tick = $4.20

Margin Requirement per contract = For Think or Swim (TOS) - varies around $4,000.00 (+/- around $1,000) and is determined from Implied Volatility (IV). So, as IV changes, so will the margin requirement. Margin Requirement for Infinity Futures is $1,000 and does not change.

Morning routine:

a) Check the Economic Calendar for relevant events.b) Read the Energy news either at cnbc.com or at reuaters.com.c) Determine where price is relative to yesterday’s close at 5:00.d) Look for recent areas of support and resistance from previous days.e) Remind yourself to be patient.f) Remind yourself that if you miss the trade entry it is okay to miss the trade.g) Limit the number of trades you make. Goal is no more than 10 to 15.

Afternoon Routine:

a) Perform post trading day review/analysis.

2. Time Period of Trading Plan:

All time identified in this plan is Eastern Standard Time (EST).

Sufficient volume and momentum typically begins at about 8:00 AM and the trading pit hours open at 9:00 AM and close at 2:30 PM. The Person’s Pivot Study (PPS) trade starts at 8:00 AM and ends typically by 10:00 AM, but could go till 11:00. Typically, there are two trade setups between 8 and 10 o’clock. Sometimes there is only one and sometimes there are three, but most often there are two.

There are typically four parts to the trading day: 1) 8:00 to 9:00, 2) 9:00 to 11:00, 3) 11:00 to 1:00 and 4) 1:00 to 2:30. The best time to trade is 9:00 to 11:00 when there is the most opportunity.

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http://www.wikinvest.com/wiki/New_York_Mercantile_Exchange


3. Active Month and Expiration:

The Active month is the month that appears when you use just /RB. For a particular month you must use the full ticker symbol for a particular month, i.e. /RBN4. N = month, i.e. in this case July. 4 = year, i.e. in this case 2014.

About the 18th to the 20th of the month the month with the most trading volume will change to the next month, i.e. about the 20th of May the month with the most daily volume will change from June to July. However, the Active month will decrease in trading volume a few days before it is changed. So, at mid-month, start looking at the next month to see when traders move on to the next month. This can be determined by how many contracts are visible in the Bid and Ask columns on the price latter. Always use the month with the greater trading volume. Typically, RB traders migrate to the next month 2 days before the expiration of the CL contract.

Crude Oil Futures expire several days before the end of the month while Gasoline Futures expire the last trading day of the month. Because Crude Oil and Gasoline trade primarily in tandem the expiration date of Crude Oil can affect price action for Gasoline, i.e. price will go up, if traders need to cover short positions on the expiration date for Crude Oil. This can be very pronounced at the end of the day. Be aware of this date when trading Gasoline Futures.

Month Codes

Month Month Code

January F

February G

March H

April J

May K

June M

July N

August Q

September

U

October V

November X

December Z

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4. Price Charts, Technical Indicators, Calendars and Reports:

The following price charts, technical indicators and calendars are used:

1) 5 Minute Candle Stick Chart (primary chart used for trading)2) 1 Minute Candle Stick Chart (secondary chart used to help see tops and bottoms of trends)3) MACD (8, 17, 9). The setting of 8, 17, 9 is critical for seeing divergences.4) Stochastic Momentum Index (SMI) (40.0, -40.0, 3, 5)5) Fibonacci Retracement Chart Tool6) PPS (Person’s Pivot Study): This is proprietary to ThinkorSwim.

(http://marketheist.com/2010/04/29/traders-lounge-john-person-covers-his-pps-indicator-with-persons-pivots/)

7) Economic News Calendar: http://www.forexfactory.com/calendar.php8) Crude Oil Futures Calendar (provides start and end date for each month):

http://www.cmegroup.com/trading/energy/crude-oil/light-sweet crude_product_calendar_futures.html

9) US Commodity Futures Trading Commission, Commitments of Traders (COT) (weekly report provides quantity of open long and short trade positions): http://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

This data does not provide any information for a specific day trade entry, but does support the daily chart trend.

10) Energy Information Administration (http://www.eia.gov/petroleum/)11) American Petroleum Institute (http://www.api.org)12) Genscape (http://www.genscape.com) (Solutions – Storage)13) Baker Hughes Rig Count: (http://www.bakerhughes.com/rig-count)

5. Economic News and Reports:

There are primarily two economic news events that affect Gasoline futures pricing, but other economic news may affect pricing.

1) The weekly Crude Oil Inventories report from The Energy Information Administration (http://www.eia.gov/petroleum/) is released on Wednesday at 10:30 AM or if Monday is a holiday, then Thursday at 11:00 AM. This report always immediately moves price explosively. This report can be seen on www.forexfactory.com.

2) The American Petroleum Institute releases a Crude Oil Inventories report on Tuesday, at 4:30 pm, but it is not a free report. This often immediately moves price explosively, but not always. It often effects the overnight price action between Tuesday and Wednesday. The information in that report can sometimes be read in the Energy News section of CNBC.com.

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http://www.forexfactory.com/

http://www.eia.gov/petroleum/

http://www.bakerhughes.com/rig-count

http://www.genscape.com/

http://www.api.org/

http://www.eia.gov/petroleum/

http://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

http://www.cmegroup.com/trading/energy/crude-oil/light-sweet%20crude_product_calendar_futures.html

http://www.cmegroup.com/trading/energy/crude-oil/light-sweet%20crude_product_calendar_futures.html

http://www.forexfactory.com/calendar.php

http://marketheist.com/2010/04/29/traders-lounge-john-person-covers-his-pps-indicator-with-persons-pivots/

http://marketheist.com/2010/04/29/traders-lounge-john-person-covers-his-pps-indicator-with-persons-pivots/


3) The Genscape reports released on Monday and Thursday do not move price. I have not yet determined how these reports affect price. You must pay to receive these reports. Once in a while the information is reported in the next morning news report.

4 The monthly Federal Open Market Committee of the Federal Reserve System FOMC Statement. Look at the Economic News Calendar for dates of release.

5) Other economic news released at 8:30 AM, i.e. the monthly GDP report, can and sometimes do affect prices.

6) If the Federal Reserve Chairperson speaks before congress at 10:00 this can cause price to chop between 9:00 and 10:0 with significant movement after 10:00.

7) Baker Hughes releases a drilling rig count every Friday. (http://www.bakerhughes.com/rig-count) The North American rig count is released weekly at noon central time (1:00 EST) on the last day of the work week. The international rig count is released on the fifth working day of each month. Traders use the rig count as a predictor of future supply and sometimes cause movement in the price. The Baker Hughes report is often cited as one of the reasons for price movement on Monday. This report tends to move crude oil (CL) on Friday more than Gasoline (RB).

6. Divergences:

Do not trade bullish divergences in a downtrend and do not trade bearish divergences in an uptrend. Look for bullish divergences in uptrends and bearish divergences in downtrends. Divergences are most effective at the top and bottom of long movements.

Trade the price action. Do not trade the oscillators (MACD/SMI). The oscillators primarily go where the price takes them, however, there are times when they indicate a slowing of buying and selling and create a divergence. That can be indicative of a change in price direction, but can be for only a small distance and does not necessarily mean a reversal of trend. It is important to know that divergences sometimes fail. They can be very indicative at double bottoms and tops or whenever price returns to intraday support or resistance.

7. Types of Trade Setups

1) PPS (Person’s Pivot Study) Arrow (use only between 8:00 AM and about 10:00 AM to 11:00 AM)A. PPS arrow plus 8 ticksB. PPS arrow third candle short tradeC. PPS arrow with pullback to 1 minute divergence

2) Break of Support3) Break of Resistance4) Divergence5) Support Bounce/Reversal from the overnight low with 1 minute and/or 5 minute bullish

divergence between 8:00 AM and 9:00 AM6) Resistance Bounce/Reversal from the overnight high with 1 minute and or 5 minute bearish

divergence between 8:00 AM and 9:00 AM

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7) A 1 minute bullish or bearish divergence between 8:45 AM and 9:00 AM after a clean downward move or upward move.

8) Retracement after long run up9) Retracement after long run down10) Sucker Punch11) Doji between 8:45 AM and 9:00 AM12) Price Patterns: Double or Triple Bottom, Double or Triple Top, Ascending or Descending Triangle,

Head & Shoulders, Inverted Head & Shoulders, W, (note this instrument never has an M pattern)13) Scalp14) Crude Oil Inventories Report15) Various additional setups16) When NOT to trade

8. Trade Entry:

I use a single entry (no template) and manage the trade to the end based on what I see.

Every trade entry should have confirming oscillators.

Technical Indicators MACD and SMI:

Chart A

Chart A (5 minute) is an example of a move downward without confirming oscillators. The price is very likely to go up with the 9:05 candle because of the MACD and SMI divergences.

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Chart B

Chart B (5 minute) is an example of a move downward with confirming oscillators.

A trade entry can be made when:

1) PPS Arrow:A. A 5 minute candle closes with a PPS arrow and the next candle, or subsequent candle, goes in

that direction for at least 8 ticks and both the 1 and 5 minute charts have confirming oscillators, both MACD and SMI. If either the MACD or SMI shows a divergence at the time the criteria of 8 ticks is met, then do not enter the trade.

Do not enter a trade between 8:00 and 8:30 that is against the established trend. It is more likely to fail than succeed. There is sometimes a reversal of trend between 8:30 and 9:00.

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Chart 1.1

Chart 1.1 (5 minutes) shows an example of a trade entry at the 8:35 candle when price went 8 ticks below the close of the 8:30 candle that has a down PPS arrow.

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Chart 1.2

Chart 1.2 (5 minutes) shows an example of a trade entry at the 8:50 candle when price went 8 ticks above the close of the 8:45 candle that has an up PPS arrow.

Chart 1.3

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Chart 1.3 (5 minute) is an example of a PPS arrow followed by a candle that did not move below the PPS candle 8 ticks. However, the 9:00 pm (first candle in white area) candle did move below the arrowed candle, therefore, a short trade could be entered at that time.

Chart 1.4

Chart 1.4 shows the 8:15 candle went 8 ticks below the 8:10 candle, which has the PPS arrow. But, it is against the upward trend without a reversal pattern between 8:00 and 8:30, so no trade entry should be

made.

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Chart 1.5

Do not use the rule “PPS arrow plus 8 ticks” when price is in a channel. This happens most often between 8:00 and 9:00 EST.

1) PPS Arrow Third Candle Short Trade

B. This is a version of the PPS arrow plus 8 ticks, but the 8 ticks are not necessary. When a red candle closes with a PPS down arrow and the following candle is white you can enter a short trade once the next candle goes below the close of the candle with the PPS arrow.

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Chart 1.6

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Chart 1.7

1) PPS arrow with pullback to 1 minute divergence

C. The 9:05 candle closed with a PPS down arrow, but price did not go 8 ticks below it. Price reversed. The 9:20 5 minute candle had a bearish SMI divergence and at the 9:21 1 minute candle. That was a short entry signal. It is not necessary to wait for price to go 8 ticks below the candle with the PPS arrow. Once you see the candle after the arrowed candle go up you should start looking for the 1 minute bearish divergence. This can typically happen between 9:00 AM and 10:00 AM.

2) Break of Support:

There is a fast moving long candle that gets a PPS arrow; you can enter a trade if the price breaks below a recent support. You may anticipate a possible fast move thru support and pre-position an entry at that price.

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Chart 2.1

Chart 2.1 (5 minute) shows the 9:20 AM candle was fast moving and broke below support. If you wait till the end of the candle, you would enter the trade too late. You should enter the trade, at the latest, at the break of support.

Chart 2.2

Chart 2.2 (5 minute) shows another example of a fast moving long candle with a PPS arrow that broke recent support. Entry can be made with the break below the sideways channel. The Doji candle forewarns of a possible move.

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Chart 2.3

When there is slow moving price action the 5 minute candle must close above resistance or below support and not have a 1 minute or 5 minute divergence in order to place a trade. If price goes above resistance or below support and then falls back and closes below the high of resistance or above the low of support, it is unlikely (although anything could happen) that price will continue up or down. This applies to price action at both Support and Resistance.

3) For Break of Resistance:

There is a fast moving long candle that gets a PPS arrow; you can enter a trade if the price breaks above a recent resistance. You may anticipate a possible fast move thru resistance and pre-position an entry at that price.

Chart 3.1

Chart 3.1 (5 minute) shows another example of a fast moving long candle with a PPS arrow that broke recent resistance and a second resistance. Entry can be made with the break of the first resistance.

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4) For Divergence:

A divergence does not necessarily signal a change in trend, although it can be the beginning of a change in trend.

a) When price is moving sideways for several minutes on the 1 minute chart and a bearish divergence appears. A short can be entered with a protective stop loss at least 10 ticks above the entry price.

Chart 4.1

Chart 4.2

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This chart shows examples of a Divergence, Double Top and Sucker Punch. The divergence on the 5 minute chart on the left has rising price with a continuously falling MACD. This type of

divergence is typically more likely to occur at a day high.

Chart 4.3

This chart shows rising price at an overnight high and is a reversal at overnight resistance between 8:00 and 9:00.

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Chart 4.4

This chart shows a 5 minute chart divergence.

5) Support Bounce from the overnight low with 1 minute and/or 5 minute bullish divergence between 8:00 AM and 9:00 AM

a) Price does not typically make a new low between 8:00 and 9:00, although it may on occasion make a new low between 8:45 and 9:00 or at least go a few ticks below and bounce back up. There is an exception when there is a continuous downtrend. It most often has a support bounce or waits till after 9:00 to make a new 5 minute candle close below support. When the price action includes a bullish divergence on the 1 minute chart a long trade can be placed with a protective stop placed 10 ticks below the low.

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Chart 5.1

6) Resistance Bounce/Reversal from the overnight high with 1 minute and/or 5 minute bearish divergence between 8:00 AM and 9:00 AM

Chart 6.1

Chart 6.1 is an example of a resistance bounce between 8:00 and 9:00.

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7)a. A 1 minute bullish divergence between 8:45 AM and 9:00 AM after a clean downward move.

Chart 7.1

b. A 1 minute bullish divergence between 8:45 AM and 9:00 AM after a clean upward move.

Chart 7.2

8) Retracement after long run up

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Seeing the top after a long run up is not always obvious. The top can form with: a) no divergence on the oscillators or b) with a divergence on the 5 or 1 minute charts or c) with a shooting star or d) with a long topping tail or e) without any topping tail. A retracement will typically go to the 38.2% Fibonacci level, but will also sometimes go to the 50% Fibonacci level or lower. Once price gets to the 38.2% level I close the trade. Often price will retest resistance, but rarely goes above resistance after reaching the 38.2% level. Do not try to go long after a retracement because it is too risky. However, if there is a retest of resistance, you can short from the top, especially, if the retest ends with an oscillator divergence.

Chart 8.1Has both topping tail and shooting star.

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Chart 8.2Has long topping tail.

Chart 8.3Relatively flat top with 1 minute bearish divergence on the MACD and SMI.

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Chart 8.4

A run up in price prior to 9:00 will likely have a retracement just like a run up after 9:00. Particularly when a new overnight high is made between 8:00 and 9:00.

9) Retracement after long run down

Retracement after a long run down may or may not have a significant retracement. A retracement from a bottom is typically different than a retracement from a top and frequently takes longer on average. Also, bottoms are harder to find than a top. Experience and judgment are your best tools for such a trade.

10) Sucker Punch

When price goes just above a previous high and then pulls back. Charts 10.1, 10.2 and 10.3 show examples of sucker punches. If a 1 minute divergence is seen a short can be taken.

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Chart 10.1

Chart 10.2

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Chart 10.3

Chart 11.3 shows a complex sucker punch with a continuous divergence on the 1 minute chart.

11) Doji between 8:45 AM and 9:00 AM

Chart 11.1

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Chart 11.1 (5 minute) shows example of when there is a Doji candle between 8:45 and 9:00. A trade can be entered once the price moves below or above the Doji candle. A Doji candle in this time period is typically a sign of a reversal and moves a significant amount for a trade.

Chart 11.2

Chart 11.2 (5 minute) shows a price move below a Doji candle at 8:50. However, the 8:55 candle ended with a divergence on with both MACD and SMI. You should exit the trade at the end of the 8:55 candle due to the divergences, but no later than when the next candle moves back 50% of the candle. The next trade setup was below the 9:10 Shooting Star candle.

12) Price Patterns: Double or Triple Bottom, Double or Triple Top, Descending Triangle, W, M, Head & Shoulders, Inverted Head & Shoulders

Double bottoms occur both with and without a bullish divergence. The DBs with a bullish divergence are the higher probability trades.

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Chart 12.1

Chart 12.1 shows both a double bottom and a W pattern. The doji on the 5 minute chart at 10:05 signaled a reversal and was supported by the MACD/SMI bullish divergence. The 1 minute chart also shows a bullish divergence within the 10:05 5 minute candle.

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Chart 12.2

Chart 12.2 (5 minute) is an example of a double bottom with rising oscillators, MACD and SMI divergences. A long entry can be made with the 10:20 candle. Some people may see this as somewhat of a triple bottom. Ultimately, it formed a W pattern.

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Chart 12.3

The descending triangle is the most occurring price pattern. Chart 12.3 shows a descending triangle on the left that has confirming oscillators, which was successful and a descending triangle on the right with

diverging oscillators, which failed.

13) Crude Oil Inventories Report

The Crude Oil Inventories report from the US Energy Information Administration is released at 10:30 am on Wednesday. If Monday is a holiday, the Crude Oil Inventories report will be released on Thursday at 11:00. This has a significant effect on price movement. There is some price movement between 9:00 and 10:30, but it is typically choppy. A 50 to 100 tick trade would be a good trade and it is suggested to sit on such a trade till after 10:30.

Generally, but not 100% of the time, price will move in one direction between 9:00 and 10:00, which will be the opposite direction of what the movement will be at 10:30.

Price does not necessarily move in the direction you would expect based on the news, so do not pay attention to what the news is. Just read the price action.

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Chart 13.1

Chart 13 (5 minute) shows the price action after the Wednesday 10:30 Crude Oil Inventories. Price came down to 2 ticks below support (2 ticks is insignificant with /RB) then reversed. A trade could be entered long above the 10:20 resistance candle.

14) When Not to Trade

When the price action before 9:00 is very erratic or in a long channel do not try to trade the price action after 9:00 until price action becomes stable and more predictable. When there is sideways congestion wait for a very good signal to enter a trade. If the trade fails, wait patiently for another entry.

Do not enter a trade in the middle of a channel. Only enter trades at the top or the bottom of a channel.

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Chart 14.1

Chart 14.1 is an example of sideways congestion with a false breakout at 9:00. There was also a second false breakout downward at the 9:55 candle.

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Chart 14.2

Chart 14.2 is an example of very erratic price action before 9:00 that carried over throughout the day. This is very untradeable.

9. Trade Exit:

Trade exit is somewhat of an art. However, so far, the data in the supporting spreadsheet identifies that with approximately 70% of the days there will be a move for at least 100 ticks after the 8 tick filter.

Exit of a trade can be:

1) At a specified tick quantity, i.e. 100 ticks.2) At a pullback to the open of the trade for a breakeven trade.3) If the candle immediately following entry does not move in the direction of the trade, close the

trade and wait for move back to the original trade entry.4) When entry is with the PPS arrow and the trade is at a loss at the close of the 5 minute candle

you entered the trade with then close the trade.5) At a divergence on a 5 minute chart or 1 minute chart.

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6) When an opposite PPS arrow appears and price goes 8 ticks beyond the close of that candle. This is a rare exit.

7) Recent areas of support and resistance. That could be overnight or a previous day.

Chart Examples for Trade Exit:

Chart 9.1

Chart 9.1 (5 minute) shows a long upward price move and tops out without any significant indication with the MACD/SMI. This is when you can use the 1 minute chart to see an indication of the top. See Chart 15 for same price move on 1 minute chart.

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Chart 9.2

Chart 9.2 (1 minute) (same price move as Chart 8.1) shows a MACD and SMI bearish divergence at the end of the upward price move.

The 1 minute chart will not always show a divergence at the end of a price move, but when it does, that is a strong indication of a top or bottom. The 1 minute chart is not an absolute indicator, but is a useful tool for decision making.

Chart 9.3

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Chart 9.3 is an example of as long as a 5 minute candle closes below the previous candle, stay in the short trade. Closing the trade when a candle closes above the previous candle is optional, but definitely do not close as long as candles close below the high of the previous candle.

10. Various Setups

Chart 10.1

Chart 10.1 shows a Shooting Star within the first three candles after 9:00. Once price falls below the bottom of the shooting star candle that is a short setup.

11. General Experiential Information:

Do not enter a trade long during a strong downtrend and do not enter a short trade during a strong uptrend. Trading pullbacks is very risky. A short trade for a retracement can be entered after a long fast uptrend and a top has been found with a divergence on the 1 minute or 5 minute chart. A long trade can be entered when a bottom has been found with a divergence on the 1 or 5 minute chart, but there

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must be enough evidence of a reversal. Long slow downtrends should never be traded long because seeing a bottom is very difficult. There should be a clear reversal before trading long.

If you are in a trade, long or short, before 9:00 and the trade does not continue in that direction with the 9:00 candle, close the trade no later than the end of the 9:00 candle and wait for another trade setup.

12. Explanation of Spreadsheet Data

Column E records the price at the low of a 5 minute candle with a yellow arrow or the high of a five minute candle with a green candle. The price below that price is the highest (for green arrow) or lowest price (for yellow arrow) before the opposite color candle appears.

Column F calculates the distance in ticks between the close of an arrowed candle and the furthest price before the opposite color candle appears.

Column G converts the mathematical calculation into a whole number representing the quantity of ticks.

Column H calculates the dollar value of the quantity of ticks in Column G.

These calculations represent the greatest value obtainable, if you entered and exited the trade at the best prices. Because it is not possible to know when the maximum price (long trade) or minimum price (short trade) is obtained they are used to determine what would be a reasonable expectation to obtain and exit the trade, thereby preserving the most profit on average, if that target were used each day. The purpose is to eliminate as much judgment as possible and make the trade as mechanical as possible. My experience has shown me that when I try to trade the price action throughout the day I often lose the money I earned in the morning. The object of this strategy is to obtain a set target and stop trading.

The right side of the spreadsheet makes conservative assumptions of what can be achieved with assumed exits.

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