Mastering Oil Derivatives Trading: Insights from Onyx Capital Group's CEO

The Evolution of Oil Derivatives Trading

Greg Newman, CEO of Onyx Capital Group, provides a fascinating look into the world of oil derivatives trading and how it has evolved over the past decade. Newman's career began at GBOM, a Russian oil company in London, before moving to Mandara Capital, one of the first independent oil derivatives trading businesses.

The Changing Landscape

Newman explains how the oil derivatives market has transformed:

• Banks were forced to restrict their involvement due to post-financial crisis regulations
• Exchanges began listing niche oil contracts as futures
• This opened up opportunities for independent traders to compete with major industry players

"The market has evolved immensely," Newman notes. "12 years later, we took our place at Mandara Capital as very young people under Alf, and such was the inefficiencies and gaps and the vacuum in the market that we built it into a burgeoning, huge volume business."

Risk Management: The Foundation of Success

One of the key lessons Newman learned early in his career was the critical importance of disciplined risk management. He emphasizes several core principles:

1. Capital Management

• Understand how to manage your capital effectively
• Don't risk your entire capital base on a single trade
• Create a repeatable system, even for discretionary trading

2. Stop-Loss Discipline

• Focus intensely on setting appropriate stop-losses
• Base stop-losses on sound market principles (volatility, liquidity, slippage)
• Use tools like standard deviations or Average True Range (ATR) to determine market "noise"

3. Risk-Reward Analysis

• Always consider the risk-reward profile of a trade
• Be willing to pass on trades with unfavorable risk-reward ratios
• Remember: there will always be another trading opportunity

Newman stresses, "It's not about being right or wrong, it's about creating a repeatable system."

The Mindset of Successful Traders

When building the team at Onyx Capital Group, Newman looks for specific qualities in potential traders:

1. Competency

• Basic mathematical skills
• Comfort with numbers
• Strong communication abilities
• Reasoning skills
• Concentration

2. Resilience

• Ability to handle monotony, especially in early career stages
• Staying true to the process, even when it's not exciting
• Taking each day as it comes

3. Humility

• Recognizing the opportunity and position you're in
• Seeing yourself as a work in progress
• Being open to learning from everyone

4. Accountability

• Accepting that trading is ultimately measured by P&L and process
• Taking responsibility for your actions and decisions
• Focusing on what you can control

Newman explains, "We have to go digging into their story and on their CV... we're looking for are they fitting this mold that we've created which we have seen translate into very successful people."

The Role of Technology and AI in Oil Trading

While embracing technology, Newman remains cautious about the role of AI in trading:

AI in Research

• Effective for supply-demand modeling
• Aggregating information from multiple sources
• Democratizing access to high-quality research

Limitations of AI in Trading

• May struggle with predictive analysis
• Cannot fully account for evolving trader psychology
• May not adapt quickly to real-time market sentiment shifts

Newman notes, "AI for trading, I don't personally think it's going to be very good at predictive because the whole point of being predictive is looking back historically."

The Future of Oil Derivatives Trading

Newman sees several trends shaping the future of the industry:

1. Digitization

• Reducing reliance on traditional brokers
• Streamlining trade execution and matching

2. Democratization of Information

• AI and technology making high-quality research more accessible
• Eroding the edge of traditional asset owners

3. Focus on Pure Trading Skills

• As information becomes more widely available, success will depend more on trader psychology and execution

4. Evolving Market Dynamics

• Increased importance of understanding market sentiment
• The role of influential players like OPEC in shaping market narratives

Advice for Aspiring Traders

Newman offers several pieces of advice for those looking to enter the oil derivatives trading space:

1. Develop a strong foundation in risk management
2. Cultivate resilience, humility, and accountability
3. Stay open to new ideas and approaches
4. Understand the evolving nature of the market
5. Be prepared for both monotony and excitement in your trading career

Conclusion

The world of oil derivatives trading has undergone significant changes in recent years, creating opportunities for nimble, disciplined traders. By focusing on risk management, developing the right mindset, and staying adaptable to technological changes, aspiring traders can position themselves for success in this dynamic market.

As Greg Newman and Onyx Capital Group demonstrate, there's still room for innovation and fresh perspectives in oil trading. By combining traditional trading principles with modern technology and a focus on performance, traders can thrive in this challenging and rewarding field.

Article created from: https://www.youtube.com/watch?v=U01gpCHd6bI