The Crack Spread trading

Intention
I've been funded by T4T, and I'd like the account to survive to the first payout, at least . This thread is intended as my journal, where I'd like, occasionally, to throw on and keep the notes and findings of the trading CFD on oil on a funded account as I go. I failed many times with many strategies, I hope this one will turn out to be stable, tradable, and profitable. Wish me luck.

What is a Crack Spread?
In the petroleum industry, refinery executives are most concerned about hedging the difference between their input costs and output prices. Refiners’ profits are tied directly to the spread, or difference, between the price of crude oil and the prices of refined products — petrol and distillates (diesel and jet fuel).
This spread is referred to as a crack spread. It is referenced as a crack spread due to the refining process that “cracks” crude oil into its major refined products.
Learn more about Crack Spreads on the CME website or google it.

Thoughts about Brokerages
The disadvantage of trading Oil, and commodities in general, through the CFD is a big spread. So, this strategy requires brokerage, having Oil spread as low as possible. This account is traded with Eightcap with 3 pips spread on oil. This was also tested on FxPig and FxFlat accounts, with a spread of 5 pips on oil. It worked as well, but the profit is slightly lower.
I've got another account with Apex and trade the same strategy on the futures market through the Rithmic, where, IMO, works the strategy much better. But CFD world has its pros, like leverage. Hence, I've been trying to use the same strategy with CFD broker.

Trading
It's a manual day trading system, trades are monitored real-time. All orders contain TP and SL, but trades close price can differ from TP. It depends on market condition. In rush hours (RTH), with a lot of liquidity and volatility available on the market, the TP can be wider, whilst in low volatility (ETH) the profit is taken much closer to entry price.

Have not heard this mentioned since my first jump into futures in the 90s. Will be following.

I screwed trading yesterday, it was many mistakes in placing trades. I have not checeked futures delta ticks volume and ask/bid ratios, which were signalling selling pressure almost the whole NY session. The strategy has many moving parts, which all need to be inlined correctly to take the trade. Lesson learnt.

Need to practice more the Crack Spread strategy and work more on my trading psychology.

I know how the pattern looks like. E.g., this one is almost perfect setup.




However, I burned the account mostly because of FOMO. Lesson learned.

I'm back with a fixed strategy. Let's see....

CRACK SPREAD
The CRACK spread is a futures transaction that parallels the process of refining Light Crude Oil (CL) into petroleum products, such as Heating Oil (HO) and Unleaded Gas (HU). Since the refining process involves “cracking” crude oil into its major components, the spread is referred to as a crack. Two of the major oil products produced in refineries are heating oil and unleaded gasoline. Therefore, the CRACK spread only involves crude oil (CL), unleaded gasoline (HU), and heating oil (HO).
The basic calculation is a simple one that is made somewhat more complicated because the quantities are given in different units. These units for crude oil (CL), unleaded gasoline (HU), and heating oil (HO) must be converted to the divisor unit. For example, CL is quoted in dollars per barrel, but HO and HU are both quoted in dollars per gallon – HO and HU must be converted to gallons, this is done by multiplying their prices by 42 (1 barrel = 42 gallons (0.16 m³)).
The price of each leg of the spread is then multiplied by the number of contracts for each leg (the default number of contracts for Crack Spreads is a 1-2-3 ratio). The cost of the crude oil is subtracted from the cost of the products, and the result is divided by the number of contracts of crude oil. This results in the following expression:
– %CL * 3 + %HU * 2 * 42 + %HO * 1 * 42

Interpretation
The combined value of heating oil and unleaded gasoline must exceed the crude oil price by more than the refining production costs. The most common ratio for the CRACK spread is 1-2-3. Three barrels of crude will produce two barrels of unleaded gasoline, and one barrel of heating oil. However, you are allowed to use other ratios when calculating the spread.
The CRACK spread results may be affected by the seasons. For instance, during the summer months, unleaded gasoline (HU) is in greater demand than heating oil (HO). During the winter months, the demand will shift to heating oil.
If a spread was too narrow to produce a refining profit, you could assume product prices would have to rise to catch up to crude oil prices. Therefore, you would favor heating oil and gasoline contracts over crude oil.
On the other hand, if there is a large spread between product and crude prices, you could assume refiners would push production and selling of unleaded gasoline and heating oil to take advantage of the profit. This increase in selling would tend to push product prices lower. Therefore, you would favor the crude oil over heating oil and gasoline.
Content Source: FutureSource

From <https://www.danielstrading.com/educa...r/crack-spread>

So what is the fix?
Previously I solely relied on Crack spread itself. It's perfect signal, for the near future price move estimation. However, it must also be in conjunction with an important price level and baked up by order flow. By order flow, I mean futures order flow. I.e., the order book condition and tick volume.
So now three things must be fulfilled to open a trade

1. Crack spread shows discrepancy with current oil price.
2. Current price must reach some important level (S/R, Supply/Demand, wholesale price etc.)
3. Order flow must be in conjunction with the expecting price move direction.

The trade can be opened only when all these three pre-conditions are satisfied/met.

All inline to go short. Although in uptrend, I'm going just for several pips/ticks. With following screenshots I want to demonstrate, how the system works.
It would also be possible to trade it as statistical arbitrage between CL and RBOB on 2nd screenshot in case the blue line (RBOB) and cyan lian (CL) are in opposite directions (which is not a case here).

Crack Spread vs. Oil:

Crack Spread vs. Refiners Margin and RBOB


Order flow:



The result. After a couple of minutes, the price dropped.