Trading on RBOB Gasoline Futures: A Trend-Following Strategy to Diversify the Strategy Portfolio

In this article, we will explore the creation of a trend-following trading system on the RBOB Gasoline futures traded on the CME. Our aim is to diversify trading strategies within an energy futures portfolio. Although the RBOB Gasoline future is smaller in scale compared to the well-known Crude Oil, significant outcomes are attainable by adhering to the traditional trend-following approach used for commodities in this sector.

However, it's crucial to recognize that this instrument also entails higher risks compared to other energy futures. Due to its lower liquidity, the RBOB Gasoline future may experience substantial slippage (operational costs arising from the difference between the theoretical and actual executed price) during order execution, particularly during nighttime hours when trading volumes are generally lower. Moreover, it's important to note that the Big Point Value, which is the value of a single point of the future, is $42,000. With a price of about $2.65, a single contract represents roughly $110,000 on an instrument characterized by considerable volatility.

Figure 1 - Buy&Hold Chart

Moving forward, let's define a trading system for the RBOB Gasoline future considering that energy futures respond well to classic breakout approaches. This implies that when there is a breakout above the high or below the low of the previous session, the market tends to continue in that direction.

The Logic of our Trend-Following Strategy on Gasoline Futures

The strategy we aim to develop follows a trend-following logic where entries are made when prices break through the highs (long trades) or the lows (short trades) recorded in the previous session. The trading session for CME RBOB Gasoline futures runs from 6:00 pm to 5:00 pm the following day, and the strategy will be developed on a 60-minute chart, with a data history from the beginning of 2010 to the end of 2022.

Market entries will be limited to one per day, and the strategy may hold positions overnight, but the duration of each operation is capped at 5 days, under the assumption that the entry signal's relevance diminishes over time. Additionally, a trading window will be used that excludes the first and last hour of trading to avoid price movements at the beginning and end of the session, which are often not indicative of the ongoing trend.

We will start with a stop loss of $1,500 and a take profit of $5,000.

Figures 2, 3, and 4 display the metrics obtained from the strategy.

Figure 2 – Strategy Performance Report for the trend-following strategy on RBOB Gasoline futures.

Figure 3 – Equity curve for the trend-following strategy on RBOB Gasoline futures.

Figure 4 – Total Trade Analysis for the trend-following strategy on RBOB Gasoline futures.

While no parameters have been optimized yet, the strategy appears effective, delivering encouraging results and a growing equity line, albeit not very steadily. This highlights the potential of the strategy, although it requires refinement. A significant concern is the average trade, which stands at $56, a value that is definitely not sufficient to cover commission costs and potential slippage in live trading.

It is therefore advisable to proceed with optimizing the strategy's parameters to explore possible improvements.

Optimizing the Trend-Following Strategy on RBOB Gasoline Futures

Let's attempt to enhance the metrics of the strategy by adjusting key parameters. First, we will optimize the take profit from $0 to $5,000 in increments of $200. From the optimization results shown in Figure 5, it is evident that around $3,000 there is an area of stability in the results, which slightly improves the average trade and notably the net profit while reducing the maximum drawdown. Selecting $3,000 as the take profit value and optimizing the stop loss from $500 to $3,000 in increments of $100 confirms that an initial value of $1,500 is optimal.

An additional step in optimization could involve limiting the number of trades by reducing the operational time window. During night hours, trading volumes are typically lower, which could negatively impact results due to the higher likelihood of slippage and the reduced significance of price movements. The optimization results for the start and end times of operations show that starting around 6:00 am and ending at 2:00 pm brings the average trade above $90.

Figure 5 and 6 – Operational window optimization for the trend-following strategy on RBOB Gasoline futures.

Lastly, given the still relatively high number of trades, further improvements could be made by limiting entries to days of indecision where the body of the previous day's bar (open-close) is less than a certain percentage of the bar’s range (high-low). Defining this percentage as the “Daily Factor,” an optimization from 0 to 1 in increments of 0.05 shows that a value of 0.65 (about two-thirds of the range) allows the average trade to exceed $114 while also limiting the drawdown.

FIgure 7 - Daily Factor Optimization

Now, with a smoother equity line and improved metrics, the strategy looks promising, though not very consistent over the years. We have achieved clear improvements, but further development is needed before considering live trading with this strategy to ensure that slippage and commissions do not erode profits.

Figure 8 – Optimized equity curve of the trend-following strategy on RBOB Gasoline futures.

Given that the strategy executes an average of about 150 trades per year, it might be feasible to apply additional filters without a significant risk of overfitting, but we leave it to readers to explore and potentially further improve this system.

Conclusions on the Trend-Following Strategy on RBOB Gasoline Futures

In conclusion, the trend following breakout strategy remains a solid approach for energy futures and may potentially be replicated on other futures in the same sector with appropriate adjustments.

Until next time, happy trading!

Andrea Unger

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.