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Oil Oracle 1.0 Technology Overview

Table of Contents

  1. Overview
  2. Step-by-Step Development
  3. Implementation Timeline

Overview

The Oil Oracle 1.0 system is designed to analyze market sentiment, volatility, and technical patterns in real-time to make informed trading decisions. The following step-by-step guide outlines each module of the system, detailing how these components will work together to identify optimal trading opportunities.


Step-by-Step Development

Step 1: News Scraper and Sentiment Analysis

Objective: Scrape and analyze relevant oil news to determine market sentiment at 9:29 a.m. EST daily.

  • Source Selection: Choose reliable oil news sources (e.g., Bloomberg, Reuters, OilPrice.com).
  • Scraping:
    • Schedule a web scraper to pull relevant articles daily.
    • Include robust error handling, using proxies and custom user agents to prevent blocking.
  • Sentiment Analysis:
    • Text Preprocessing: Clean and standardize text data by removing HTML tags, punctuation, and irrelevant symbols.
    • NLP Model: Use a model like BERT to determine sentiment.
      • Assign -1 for positive and +1 for negative sentiment based on expected price movements.
    • Confidence Score: Output a decimal confidence score to reflect sentiment strength (e.g., -0.8 for strong positive, +0.4 for moderate negative).
  • Backtesting: Validate the model by testing historical oil-related news and price trends.

Step 2: Confidence Scoring Module

Objective: Assign confidence scores to sentiment analysis predictions.

  • Algorithm:
    • Use ensemble learning, averaging predictions across multiple NLP models.
    • Factor in the reliability of news sources and historical impact on oil prices.
  • Quality Control:
    • Filter out low-confidence predictions below a threshold (e.g., 80%) to reduce false signals.

Step 3: Pre-Market Volatility Assessment Module

Objective: Assess potential price movement based on historical patterns and pre-market data.

  • Volatility Analysis:
    • Use volatility indicators like Average True Range (ATR) and options data for implied volatility.
    • Backtest historical price reactions to similar news events.
  • Predictive Model:
    • Employ machine learning models (e.g., LSTM, XGBoost) to estimate daily volatility using news strength, previous days price action, and economic indicators.
    • Output: Predict intraday price movement in percentage terms to inform profit targets and stop-loss levels.

Step 4: Historical Pattern Matching

Objective: Validate analysis by comparing current sentiment and volatility to historical data.

  • Pattern Matching:
    • Build a repository of similar historical news events and their impact on oil prices.
    • Use clustering algorithms to match patterns and assign a correlation score.
  • Thresholds: Set a minimum correlation requirement to validate trading signals.

Step 5: Technical Confirmation through Chart Analysis

Objective: Align technical analysis with sentiment and volatility insights.

  • Technical Analysis:
    • Incorporate indicators like Moving Averages, RSI, and Bollinger Bands, and analyze support/resistance levels.
    • Set confirmation rules (e.g., positive sentiment aligns with a support bounce).
  • Confirmation Logic:
    • Only proceed with trades if technical indicators align with sentiment (e.g., RSI reversal confirming bullish sentiment).

Step 6: Trade Execution Decision Module

Objective: Use combined insights to make trade decisions and select options contracts.

  • Price Projection: Combine sentiment, volatility, historical patterns, and technical confirmation.
  • Options Selection:
    • Assess risk and profitability using criteria like delta, theta, strike price, and expiration.
  • Risk Management:
    • Set dynamic stop-loss and take-profit levels based on volatility predictions.

Step 7: Trade Monitoring and Exit Strategy

Objective: Monitor ongoing trades and exit based on real-time market conditions.

  • Monitoring:
    • Track real-time sentiment, price movements, and technical indicators.
    • Set alerts for mid-day sentiment changes or volatility spikes.
  • Exit Criteria:
    • Profit Target: Sell at a pre-defined profit percentage.
    • Stop Loss: Exit if a maximum loss threshold is met.
    • Trend Reversal: Adjust or exit positions if technical indicators show reversals.

Implementation Timeline

Week Task
Weeks 1-2 Develop news scraper and sentiment analysis system
Weeks 3-4 Implement confidence scoring and pre-market volatility module
Weeks 5-6 Develop historical pattern matching and technical confirmation modules
Weeks 7-8 Build decision-making and trade execution modules
Weeks 9-10 Integrate monitoring, alerts, and real-time adjustments

This approach will lead to a robust, modular trading system combining real-time data processing, machine learning, and strategic decision-making capabilities.