Imagine you have a trading method which trades the GLOBEX west Texas crude oil contract (ticker:CL). This is a futures contract that represents 1000 barrels of crude oil. At current oil prices, the contract has a value of about $100,000. Price for CL is specified in dollars per barrel, and the tick is one cent per barrel, or $10 for the contract. Now, let’s say this method has very simple trade management – once a trade is entered, a stop loss order is placed 10 ticks away from the entry price, and a limit order to exit is placed 10 ticks the other direction. These orders are set up as a “one cancels all” or OCA group, meaning that if one of the two exit orders executes, the other is canceled.
This is a very simple type of trade setup, and is common for very short term trades. In this example once you enter a trade (assume a 1 contract position) you should get one of two resuls:
- You win $100 minus fees
- You lose $100 plus fees + slippage
Fees in this example are simply your transaction fees. Slippage is the cost associated with stop orders executing at a price worse than the trigger price, which they can do since they trigger market orders. For now, let’s assume that the round trip transaction fees for 1 contract of CL are $4 (my broker charges $4.01 for some strange reason) and that slippage is zero. The slippage assumption is unrealistic and I’ll address it in a subsequent post, but for now I want to get at a different aspect of the situation. I want to know:
How often do you have to place your trade in the right direction in order to make good money here? Continue reading →