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Guide to Crude Oil Trading

Read our complete guide to oil trading, including how to become an oil trader and the best tips for trading crude oil.

Crude oil is one of the most actively traded commodities in the world. A raw material that is commonly extracted from Middle Eastern countries, it is used globally, as petroleum for travel and transportation purposes, but also as a component in producing consumer goods.

Trading within the oil markets can be a risky move, given the increased volatility throughout recent years. Where supply and demand are constantly changing, so is the price of oil. However, crude oil is a liquid commodity, meaning that it can be traded in large volumes.

The most popular products available to trade are Crude Oil Brent and Crude Oil West Texas Intermediate (WTI), which are two major classifications of crude oil that are bought and sold on an international level. There is also the option to trade on heating oil, gasoline (petroleum) and low sulphur gasoil, although this article will mainly focus on the two principal crude oil commodities.

Oil ETFs

A slightly different method of oil investment is through ETF trading. Exchange-traded funds are a type of investment fund that can grant traders exposure to the oil market through holding a collection of underlying assets, which in this case would be shares in oil companies. Crude oil ETFs are bought and sold in the same way as many other shares in the stock market. When the price of oil fluctuates, this also has an influence on the share price of oil companies and subsequently, the value of the ETF.

It can be difficult to trade oil stocks in the long-term as the value and price of oil is constantly changing, therefore many traders prefer to use more short-term trading strategies, such as day trading. This way, the ETF value is reflected in the daily price change of oil and it is easier to analyze trends in price charts and graphs in order to predict future movements. An oil ETF is a collection of shares that can be traded within the market but the trader still does not own the underlying asset. It is important to remember that leveraged ETFs are complex financial instruments that carry significant risks. Certain leveraged ETFs are only considered appropriate for experienced traders.

How to trade crude oil futures

Perhaps the most popular method of crude oil trading is through futures contracts, also known as forwards. Oil futures are an agreement to buy or sell an exact amount of oil for a set price at a set date in the future. This type of contract trading is commonly seen within the commodities market due to the volatility of oil pricing. Rather than purchasing oil at its spot price, storing and then waiting for its value to increase within the market to then be sold again, futures prices predict how much the oil will be worth when it expires on the set date. It is an easier way to take advantage of price fluctuations without physically owning the underlying asset. However, trading oil futures can be a risky process as futures prices will also fluctuate depending on the price of oil, which is impacted by many external factors.

How to become an oil trader

  • Choose your preferred crude oil to trade, whether that be Brent or WTI.
  • Remember that the commodities market can be very volatile, especially in times of political or economic uncertainty. We advise our clients to keep up to date with news and economic insights in order to stay reactive to changes in the market that may affect their positions.
  • Make sure you have built a thorough and effective trading strategy that utilizes stop-loss orders. These can help to reduce losses when market volatility is high.

Oil trading strategy

Aside from the trading product that you decide to use, there are also various trading strategies that are better suited for the commodities market. For example, day trading oil is a popular strategy that aims to take advantage of price movements on a short-term basis. As we have discussed, the price of oil can fluctuate often, and although the raw material usually boasts a fairly low spread and a general market stability, it is still possible to make money from small price movements. Day trading crude oil, along with other trading strategies including news trading and scalping, require an advanced level of technical analysis and understanding of price charts, as they can present many risks.

Technical and fundamental analysis

Crude oil is one of the most liquid commodities within the market, which means that it can be traded in large volumes and there is extensive data to analyze. In order to fully understand the oil market and be able to make future predictions, traders are required to perform some research of their own, including technical and fundamental analysis. This will give an insight into market trends and also help to build knowledge of the asset itself.

For example, fundamental analysis is useful in evaluating the value of oil, through company financial statements, oil trading news releases and the general economic stability of a region that you are trading in. For example, if there is a news announcement of an oil spill or cut in production, this will affect the price of oil and its trading companies, which will need to be factored into your trading strategy. This is considered fundamental analysis.

Studying price charts, graphs, and technical indicators to extract numerical information is all part of technical analysis, which usually is the second stage of the process. However, both strategies are needed for oil trading, as the commodity can be highly volatile and therefore it benefits to use a comprehensive perspective.

Trade on commodity indices

Trading commodity indices allows you to invest in not only one commodity but a collection within the same sector, including Crude Oil Brent, Crude Oil West Texas, Natural Gas, Heating Oil, Gasoline and Low Sulphur Gasoil. This will give you further exposure to the commodities market, while also helping to diversify your trading portfolio.

Source: CMC Markets UK

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