This month we get the opportunity to talk to a professional oil spread trader - While the time and effort involved in his trading day is far beyond what most of us have to spare - it is interesting to see his approach and again to hear about the importance of risk control! TL is the head trader at a privately owned investment firm based in Dublin.
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Financial-Spread-Betting: What assets do you trade and what is your basic approach?
TL:
I really only trade oil professionally I have the odd flutter on the Dow or the Dollar but that is just for fun- oil and oil derivatives are my chosen trading tools. My approach is very short term typically somewhere between 1 and 24 hours. I might occasionally hold a position over a few days but usually regret it.
There are many different approaches to trading, some guys will buy in January and sell in March and make a lot of money doing it but that's not what I am good at. Having worked in the market in a number of different roles I think my edge is in short term trading because I can generally tell what all the major market participants are thinking. So my approach is to try to take the easy money out of the markets on a short term basis.
Financial-Spread-Betting: What do you mean by easy money?
TL:
Well the way I look at it there is easy money and hard money to be made in the markets. Easy money is where you go with the volume - go with the trend. The harder money is where one tries to pick the bottom or top of a move. People try this because the trade looks "cheap" or "expensive". This can make you look foolish because the parameters are always changing.
Like any market the oil market is made up of a number of different types of participants:
Each of these groups has its own distinctive agenda. Now obviously views will change but each of the participants has a reasonably consistent decision set and if you know what that is you can predict their behaviour. That is where my expertise lies and as a smaller sharper investor I can take consistent profits out of the market.
It is essential to try to identify any short term pattern in the markets. For example, if the market opens down on Monday and then rallies in the afternoon and does the same thing on Tuesday then there is a strong probability that it is going to repeat that pattern on Wednesday and Thursday. The identification of long term patterns are helpful also. One does not need to know why they happen, just that they do exist.
Also, I have come to believe that the seasonal effects are very important in the commodity markets and oil in particular. So everyone goes crazy about the US driving season in March and then forgets about it in May. I wouldn't always trade with the seasonal trend but I would have to have a damn good reason to trade against it!
Financial-Spread-Betting: So what kind of profit are you looking for on a trade and how much are you prepared to give up in downside if you make the wrong call?
TL: I am looking to take about 20 points out of a trade on average and I am probably not typical of most traders in that I might risk 30 or 40 points on the downside to make that 20 point gain. Everyone tells you that you should not be prepared to risk more than you are looking to gain but I am generally right a lot more often than I am wrong so I can give my positions a bit more space to come good.
Financial-Spread-Betting: So how are you doing so far this year?
TL: Well it is only June and it feels like December. I am well up but I should be up a lot more given the amount of work I have put in. That's trading- other years you can make some good money with no trouble at all. I strayed a little from my core strategy and lengthened out my trading horizon which distracted me from my strongest area.
Financial-Spread-Betting: How did you get involved in trading?
TL: I started as an over-qualified and under-paid runner on the floor of the IPE (The International Petroleum Exchange in London) I worked my way up to broker and then after a few years I moved to a private Swiss firm to start trading professionally. A couple of years ago my wife and I decided it was time to come home and we moved back to Dublin so that I could start my own trading firm which is what I had always wanted to do.
Financial-Spread-Betting: Did your trading approach evolve over time in response to experience?
TL: Oh absolutely- Looking back I am almost embarrassed at how little I knew in the early days and how much I thought I knew. I learned a lot about the technical analysis and fund flow when I was broking because brokers talk to all the major participants. When I started trading I had to put everything together into a strategy and set of trading rules.
Financial-Spread-Betting: What are those trading rules?
TL: Never risk more than 2% of your trading book. That is an important rule for me because I trade so frequently and at such high leverage. If you are buying AIB or something you probably don't need to be so tight. You will be wrong on many occasions - Don't let it get to you Try to eliminate the emotion on trades as much as possible Every day is a new beginning Enjoy the experience I have a lot of other market specific rules but they are the generic ones.
Financial-Spread-Betting: What is your typical spread trading day?
TL: I start with some charting based on closing prices from the day before. Then I check the news feeds and watch the market open at 8:00. Then I will hit the phones and talk to all types of market participants, brokers, fund managers, refiners, proprietary traders, etc. This is what gives me the insight as to how everyone is thinking and is a vital part of my day. If I am going to trade it will usually be in the mid- morning, late afternoon or in the hour or so before the close because that is when I feel the market is most predictable. Straight after lunch for example when the US market opens there is just too much volume which makes it very unpredictable.
Financial-Spread-Betting: You mentioned charting, what charts do you use?
TL: I like 8 and 34 day moving averages because they are Fibonacci numbers and a lot of people in the oil market use them. The 5 and 20 day moving averages are a handy tool across all markets because they loosely represent the trading week and the trading month. I will also have the long term trend in the back of my mind. I like using Japanese candle sticks which give me very clear picture of any emerging patterns. I also focus very closely on the RSI and Stochastics relative to the price. So for example if the price is rallying strongly and the RSI begins to fall away I will be looking to trade on the short side.
Financial-Spread-Betting: Are there any trades in your career that stand out as particularly memorable?
TL: May 2004 was the first time WTI (West Texas Intermediate- the benchmark US crude) exchange traded futures breached $40.00. I had worked in the market for 10 years and this number was "The Holy Grail" of crude trading. It was considered very "expensive" at that price, now, 10 months later, it would be considered "cheap". The parameters have completely changed.
Financial-Spread-Betting: What is your approach to risk control?
TL: If it goes the wrong way cut it! I don't always use stop loss orders but that is because I am staring at the price action all day- In general you should always use stop loss orders and don't move them.
Financial-Spread-Betting: What do you believe are the characteristics of a truly superior spread trader?
TL: Some market insight- You have to find where you have an edge against the market and work hard at exploiting it. Ruthless Cash Management- There is no strategy that is right all the time so as a trader you are going to be wrong quite a lot of the time. You need to have strategies to handle that. I never risk more than 2% of my overall trading capital on a single trade. That way you can get it wrong quite a lot and still live to trade another day. The reason most amateurs fail in the market is because they think it is all about making the right calls- it is actually how you react when you get it wrong that makes the difference. Discipline of Iron- People always focus on beating the other people in the market but really the person you are trying to master is yourself. It is vital to control your emotions- you must trade with your head. It is a daily battle and if I am to be honest about it- some days I lose.
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