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Brent/WTI Hedging Strategy

  • #81
  • Sep 16, 2019 9:41pm Sep 16, 2019 9:41pm
Wouldn't swap be a problem?
  • #82
  • Sep 16, 2019 11:15pm Sep 16, 2019 11:15pm
@C8H18
Yes, you are right. But this does not matter enough to explain the different prices.

The strategy is looking for a correction of an imbalanced pricing. The bigger the spread between both the better it is for the strategy. Brent and WTI are highly correlated pairs. In a perfect market situation both should price almost the same.

If we like we could call it an arbitrage strategy. Because of this it is important to manage the risk of both positions right.
  • #83
  • Sep 18, 2019 10:54am Sep 18, 2019 10:54am
I'm thinking for this type of strategy to be profitable, we'd need an indicator (line chart) that plots the spread between WTI and Brent. So if the spread is well-above X level we'd sell WTI/buy Brent, and if it is well-below X level, we buy WTI/sell Brent. When the spread is on the extreme end, we open a trade, but when the spread is close, we stay out.

I haven't worked out all the details but I think we'd need something like that so we know when the spread is historically large and small.
  • #84
  • Sep 18, 2019 11:54am Sep 18, 2019 11:54am
Quoting vpn
I'm thinking for this type of strategy to be profitable, we'd need an indicator (line chart) that plots the spread between WTI and Brent. So if the spread is well-above X level we'd sell WTI/buy Brent, and if it is well-below X level, we buy WTI/sell Brent. When the spread is on the extreme end, we open a trade, but when the spread is close, we stay out. I haven't worked out all the details but I think we'd need something like that so we know when the spread is historically large and small.
This strategy has possibilities to work. Years ago you could arbitrage EUR/USD and USD/CHF.
  • #85
  • Sep 18, 2019 12:02pm Sep 18, 2019 12:02pm
A BRENT/WTI chart is on the homepage.
  • #86
  • Sep 18, 2019 12:24pm Sep 18, 2019 12:24pm
Quoting deuce
A BRENT/WTI chart is on the homepage.


But I think we need Brent-WTI instead of Brent/WTI. (Brent minus WTI, not divided by)

... I wonder if there's a way to work with that instead though...
  • #87
  • Sep 18, 2019 5:31pm Sep 18, 2019 5:31pm
Quoting Adabi
@C8H18 Yes, you are right. But this does not matter enough to explain the different prices. The strategy is looking for a correction of an imbalanced pricing. The bigger the spread between both the better it is for the strategy. Brent and WTI are highly correlated pairs. In a perfect market situation both should price almost the same. If we like we could call it an arbitrage strategy. Because of this it is important to manage the risk of both positions right.
Thank you for the clarity! We are dealing with "Jedi-Mastery" level trading in this study!

I'll be following intently!

Quoting Peluq
Wouldn't swap be a problem?
I'm interested in this as well?

Quoting deuce
A BRENT/WTI chart is on the homepage.
Quoting vpn
{quote} But I think we need Brent-WTI instead of Brent/WTI. (Brent minus WTI, not divided by) ... I wonder if there's a way to work with that instead though...
  • #88
  • Sep 18, 2019 6:50pm Sep 18, 2019 6:50pm
Quoting deuce
{quote} This strategy has possibilities to work. Years ago you could arbitrage EUR/USD and USD/CHF.
I agree it seems to have potential, but one thing concerning is this type of trade is very easy for CTAs to put on. This kind of reminds me about that famous $100 bill on the ground example for economists:

A hundred-dollar bill is lying on the ground. An economist walks past it. A friend asks: "Didn't you see the money there?" The economist replies: "I thought I saw something, but I must've imagined it. If there had been $100 on the ground, someone would've picked it up."
Self-sufficiency is the greatest of all wealth. - Epicurus
  • #89
  • Sep 19, 2019 9:17am Sep 19, 2019 9:17am
Quoting vpn
{quote} But I think we need Brent-WTI instead of Brent/WTI. (Brent minus WTI, not divided by) ... I wonder if there's a way to work with that instead though...

The ratio shows correlation. When it deviates from a baseline by a predetermined amount you place the trades and close them when it reverts to the mean. The baseline depends on you time frame. It could be just an SMA.

Major caveats though. Correlations can and do break down and stay that way for extended periods. Things may go smooth for awhile but eventually you will have a major drawdown and will need to average down. The tendency is for traders to see all the small wins then get greedy and place larger trades just when the correlation begins to break down. This is not a great strategy for traders with small accounts or who trade with high leverage.
  • #90
  • Sep 19, 2019 12:06pm Sep 19, 2019 12:06pm
Check this out - on tradingview I was able to plot UKOIL-USOIL (minus, not divided by) to see the spread between the two:

Date range: Sep 2016 til now:
Attached Image (click to enlarge)
Click to Enlarge Name: Screenshot1.png Size: 51 KB

The spread between the two is 6.11 currently, but has gone as high as 11 in the last couple years. Maybe with this system when it gets up to 10/11 range, we buy USOIL, and sell UKOIL - expecting the spread to get smaller eventually.

Conversely the lowest it's been in recent years is in the $2-3 range. If it were to get down there again I'd sell USOIL and buy UKOIL.

(I hope I got that right, I'm on little sleep this week)
  • #91
  • Sep 19, 2019 8:43pm Sep 19, 2019 8:43pm
Quoting vpn
Check this out - on tradingview I was able to plot UKOIL-USOIL (minus, not divided by) to see the spread between the two: Date range: Sep 2016 til now:{image} The spread between the two is 6.11 currently, but has gone as high as 11 in the last couple years. Maybe with this system when it gets up to 10/11 range, we buy USOIL, and sell UKOIL - expecting the spread to get smaller eventually. Conversely the lowest it's been in recent years is in the $2-3 range. If it were to get down there again I'd sell USOIL and buy UKOIL. (I hope I got that right,...
Yes I agree this is the better way to look at it. The spread has been volatile the past two years which is probably better for this type of trading strategy.

I like your idea to play the top of the range at 10 and the bottom at 3 but I think if the spread hits 12 you have to cut any losses and step away. Under certain conditions the spread can widen significantly.
  • #92
  • Sep 20, 2019 2:51pm Sep 20, 2019 2:51pm
Yeah we'll have to see the spread. Right now the spread is lying in the middle of the range... currently at 6.13, barely unchanged since yesterday:
Attached Image (click to enlarge)
Click to Enlarge Name: Screenshot1.png Size: 31 KB

So.... I sit out of this system for now.

However I'll watch this chart to see any developments.
  • #93
  • Sep 20, 2019 7:46pm Sep 20, 2019 7:46pm
Quoting vpn
Yeah we'll have to see the spread. Right now the spread is lying in the middle of the range... currently at 6.13, barely unchanged since yesterday:{image} So.... I sit out of this system for now. However I'll watch this chart to see any developments.
Better not to rush it anyway. My prediction is that the spread will widen next and there will be an opportunity to play it tighter.
  • #94
  • Sep 21, 2019 12:05am Sep 21, 2019 12:05am
Quoting vpn
Check this out - on tradingview I was able to plot UKOIL-USOIL (minus, not divided by) to see the spread between the two: Date range: Sep 2016 til now:{image} The spread between the two is 6.11 currently, but has gone as high as 11 in the last couple years. Maybe with this system when it gets up to 10/11 range, we buy USOIL, and sell UKOIL - expecting the spread to get smaller eventually. Conversely the lowest it's been in recent years is in the $2-3 range. If it were to get down there again I'd sell USOIL and buy UKOIL. (I hope I got that right,...
I have a theory on that this strategy may only work for a medium timeframe like 15m-1h.

The issue I see with daily is you run the risk of holding the position too long and the futures contracts may simply expire with the spread then the next month contract converges. I'd have to look more into this, but logically it seems like that might happen so I wouldn't want to take a trade that lasts too long.

On the other end, this could work in theory on a 1m timeframe but there's very stiff competition in this area. Quant funds will be on the other side of the trade and that's not a winning battle for retail traders.
Self-sufficiency is the greatest of all wealth. - Epicurus
  • #95
  • Sep 21, 2019 2:14pm Sep 21, 2019 2:14pm
If you don't mind I would like to add something and BTW the top chart shows very good what we are talking about. Thanks for sharing it.

Please don't forget the price movement. You all should check out the difference in the daily momentum of each pair. That is difficult in MT4 to compare, but this is another important factor. One of the pairs should move faster than the other "to catch up". Sorry, my English is too bad to explain it better.
  • #96
  • Sep 23, 2019 12:16pm Sep 23, 2019 12:16pm
If the cycle doesn't complete fast. Swap kills this strategy.
  • #97
  • Sep 23, 2019 2:30pm Sep 23, 2019 2:30pm
Have to agree that this should be confined to medium TFs, and is largely dependent on other things such as volume at any given time. That being said, I do believe this can present some opportunities, which I plan to keep an eye out for.
  • #98
  • Sep 23, 2019 5:25pm Sep 23, 2019 5:25pm
Quoting Peluq
If the cycle doesn't complete fast. Swap kills this strategy.
Interesting, thanks for sharing that. I don't trade CFDs so I'm not aware of what the swap would be like. I'm looking at trading this with CL and BZ futures.
Self-sufficiency is the greatest of all wealth. - Epicurus
  • #99
  • Edited 6:07pm Sep 23, 2019 5:54pm | Edited 6:07pm
I've been in the trade for 12 days. It's slowly but surely coming back and might just turn positive. We'll see!
Attached Image (click to enlarge)
Click to Enlarge Name: SNAG-3 6.54.11 PM.png Size: 18 KB
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  • #100
  • Sep 23, 2019 7:04pm Sep 23, 2019 7:04pm
Quoting EventsTrader
I've been in the trade for 12 days. It's slowly but surely coming back and might just turn positive. We'll see! {image}
Sounds like the system is a bit dull. Maybe increase the risk by adding to your exposure on one leg of the trade?
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