Shorting Oil When the Dollar Rises – Trading Insights

The price of oil is seen as a hedge against a falling dollar. If the dollar falls, the oil price should rise (or vice versa). What happens the next day if they go in tandem? Let’s test an oil and dollar trading strategy.

Trading Rules

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1. If the dollar rises more than 0.25% (using UUP as a proxy) from yesterday’s close until today’s, and USO also rises 0.25%, go short USO at the close and exit on the close next day.

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This is all there is to it. Here are the results from January 2007 until the present:

And here is the equity curve:

Some of these gains are unlikely to come from the dollar effect: Before you invest in USO, you have to understand how it’s structured. It’s meant to replicate the price of oil, but in the long term it won’t because of different costs. There is a lot of info about it on the internet.

Relevant article:

• How to trade and invest in oil stocks (trading strategy and seasonality)

We have probably only touched upon the links between oil and the dollar. You can probably backtest many other ideas that backtest oil and dollar strategies.

FAQ:

– What is the relationship between the price of oil and the value of the U.S. dollar?

The price of oil is often considered a hedge against a falling U.S. dollar. When the dollar weakens, oil prices tend to rise, and vice versa.

– How can this relationship be used to develop an oil and dollar trading strategy?

A trading strategy can be developed by looking for instances when both the U.S. dollar (using UUP as a proxy) and the price of oil (USO) rise more than 0.25% from the previous day’s close. When this condition is met, the strategy involves going short on USO at the close and exiting the trade on the next day’s close.

– Are there factors other than the relationship between oil and the dollar that might influence these trading results?

Some of the gains from this strategy may be influenced by factors other than the dollar effect. USO, which aims to replicate the price of oil, may not perfectly mirror oil prices in the long term due to various costs and structural differences.