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.
- 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.
This is all there is to it. Here are the results from January 2007 until the present:
|P/L in %||#trades||#wins||Avg|
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.
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.