The first goal of every swing trader is to determine whether the market is ranging or trending. One of the easiest ways to do so is to utilise the Wyckoff Cycle theory, which differentiates between Distribution/Accumulation ranges and Markup/Markdowns. The breakout above the upper boundary of the Accumulation range (the major resistance level at 43.60) signalled the beginning of a new Markup. This represented the first hint for swing traders that they could join the newly emerging uptrend.
The second goal is to spot a trend continuation pattern in the new trend, which would allow swing traders to join it in anticipation of further directional price action. The two rectangles manifest such trend continuation patterns on the chart above. The breakouts above them signalled suitable entry levels, whereas the two lower boundaries of each rectangle highlighted the preferable areas for placing stop-loss orders.
At present, the price action of crude oil futures is contained within the boundaries of a significant Distribution range, spanning between the major support level at 57.60 and the major resistance at 66.60. Naturally, swing traders will be eying to catch the emergence of a new Markdown, which would represent the logical continuation of the Distribution range.
In order to determine the potential risk from selling ahead of time, swing traders can use the Fibonacci retracement levels to determine the crucially significant targets for the newly emerging downtrend. These Fibonacci levels represent the crucial retracements from the peak of the previous uptrend, which makes them such prominent targets.
A breakdown below the Distribution's lower boundary (57.60) can be interpreted as the first sell signal. However, bears should be cautious of potential pullbacks within the boundaries of the Distribution. Such pullbacks can reach as high as the 23.6 per cent Fibonacci at 59.88, which is why a stop-loss order should be placed above it. In other words, bears looking to sell below 57.60 stand to lose at least $2.28 per barrel on such a short trade (Risk Area 1).
More risk-averse traders, in contrast, can wait for the price to break down below the 38.2 per cent Fibonacci at 54.86 before they sell. They would naturally place a stop-loss order at (or slightly above) the Distribution's lower boundary at 57.60 (because then it would be the closest resistance). Hence, their total risk will amount to $2.74 per barrel (Risk Area 2).
At first glance, the second scenario entails more risk (0.46 cents per barrel); however, swing traders will likely draw a different type of comparison between the two. Traders choosing the first scenario would have to consider the possibility of the price action finding support from the closest Fibonacci retracement, which in this case would be the 38.2 per cent. In other words, they would stand to win essentially what encapsulates Risk Area 2. Hence, unless the price manages to break down below the latter, traders who chose scenario 1 would face a risk/reward outlook of roughly 1:1.
On the other hand, traders preferring scenario 2 would notice that the next target for the price action (after it breaks 54.86) would be the final 61.8 per cent Fibonacci retracement at 46.74. They stand to win $8.12 (54.86-46.74) per barrel, which encapsulates the Profit Area (in green). With a potential risk of $2.74 and a potential profit of $8.12, these swing traders would face a risk/reward ratio of almost 1:3 (2.96).
While the risk/reward outlook of scenario 2 is much better than scenario 1 (three times better), the ultimate decision of where to sell would depend mostly on each trader's own risk-aversion. While scenario 2 strives to provide entry into a more robust trend, scenario 1 entails better prospects for early entry, which could prove more profitable in the long-term (Profit Area + Risk Area 2).
The second goal is to spot a trend continuation pattern in the new trend, which would allow swing traders to join it in anticipation of further directional price action. The two rectangles manifest such trend continuation patterns on the chart above. The breakouts above them signalled suitable entry levels, whereas the two lower boundaries of each rectangle highlighted the preferable areas for placing stop-loss orders.
At present, the price action of crude oil futures is contained within the boundaries of a significant Distribution range, spanning between the major support level at 57.60 and the major resistance at 66.60. Naturally, swing traders will be eying to catch the emergence of a new Markdown, which would represent the logical continuation of the Distribution range.
In order to determine the potential risk from selling ahead of time, swing traders can use the Fibonacci retracement levels to determine the crucially significant targets for the newly emerging downtrend. These Fibonacci levels represent the crucial retracements from the peak of the previous uptrend, which makes them such prominent targets.
A breakdown below the Distribution's lower boundary (57.60) can be interpreted as the first sell signal. However, bears should be cautious of potential pullbacks within the boundaries of the Distribution. Such pullbacks can reach as high as the 23.6 per cent Fibonacci at 59.88, which is why a stop-loss order should be placed above it. In other words, bears looking to sell below 57.60 stand to lose at least $2.28 per barrel on such a short trade (Risk Area 1).
More risk-averse traders, in contrast, can wait for the price to break down below the 38.2 per cent Fibonacci at 54.86 before they sell. They would naturally place a stop-loss order at (or slightly above) the Distribution's lower boundary at 57.60 (because then it would be the closest resistance). Hence, their total risk will amount to $2.74 per barrel (Risk Area 2).
At first glance, the second scenario entails more risk (0.46 cents per barrel); however, swing traders will likely draw a different type of comparison between the two. Traders choosing the first scenario would have to consider the possibility of the price action finding support from the closest Fibonacci retracement, which in this case would be the 38.2 per cent. In other words, they would stand to win essentially what encapsulates Risk Area 2. Hence, unless the price manages to break down below the latter, traders who chose scenario 1 would face a risk/reward outlook of roughly 1:1.
On the other hand, traders preferring scenario 2 would notice that the next target for the price action (after it breaks 54.86) would be the final 61.8 per cent Fibonacci retracement at 46.74. They stand to win $8.12 (54.86-46.74) per barrel, which encapsulates the Profit Area (in green). With a potential risk of $2.74 and a potential profit of $8.12, these swing traders would face a risk/reward ratio of almost 1:3 (2.96).
While the risk/reward outlook of scenario 2 is much better than scenario 1 (three times better), the ultimate decision of where to sell would depend mostly on each trader's own risk-aversion. While scenario 2 strives to provide entry into a more robust trend, scenario 1 entails better prospects for early entry, which could prove more profitable in the long-term (Profit Area + Risk Area 2).