What is the optimal stop size for intraday and day trading in Crude Oil Futures?

The Oil Trading Room has done many studies on the distribution of pricing around various points in the market in the intraday and day trading time frames.  Today a member asked me about stop sizes so I decided to go back over some of these numbers with specific reference to stop size.

One number we use is the stretch. Stretch is the lesser of the high - open and the open minus the low of a given interval. These numbers are remarkably tight with small variance and that number specifically tells us how much risk there is at any given point and how big of a stop you need to get on the right side of the market if your trade placement is average. If your trade placement is really good, you may be able to use smaller stops but in general, I have found these numbers work and my stops are not hit that often. Look at the table below:

Stretch Dist By Period since 20140901

If you look closely at this table you can see the Stretch is about 10 ticks on average (in the summary) with a standard deviation of about 4 ticks. This should include about 68% of all cases but due to skewing in the market, you can see the numbers are a little better than this in general.  For example, 14 ticks, which should be about 68% is actually about 72% of cases (again see summary at the 14 tick level).  Why 14 ticks?  Because this is 10 ticks average plus the 4 tick deviation value.

The table above is measured at 30 minute intervals but there is no particular reason to believe it is substantially different at any other time. In other words.  This size of movement should be fairly normal most of the time and the ratio between the stretch and the extension is close to 3:1. This means a 14 tick stretcher in A period/column is associated with 45 tick moves in the opposite direction (stretcher).  This on its own is an excellent risk reward ratio if you have aligned yourself to be ont he right side with room techniques and triggers.

We can see the variance changes a bit by the time of day (A period is the first 30 minutes and K is the last, so look at the respective columns) and you can also see that 86% of cases are less than 18 ticks.  This means you could possibly even construct a profitable trading system based on these stops alone (we are not suggesting that) but understanding these numbers certainly can improve your understanding of how Crude Oil Trades and where you are in a context and risk reward profile at any given time while trading during the day.

The very best stop is one that is never hit.  Stops that are hit are often selling where you should be buying and buying where you should be selling.  If your stops are being hit, it is a feedback system telling you that you need to improve your trade placement.  If you need assistance with this, ask in the room.

Nothing is worse than buying where you should be selling and selling where you should be buying.  Techniques we use in the room for cycle counts and triggering make it possible to get excellent trade placement that makes stops being hit a less frequent occurrence.

We look forward to seeing you in the room!