Crude oil is one of the world’s most demanded commodities and its price fluctuations make it very attractive to traders. With a strong trading plan and strategy, investing in crude oil can bring you huge profits. Find out more below about the “black gold” market, what influences it and how you can enter it in a successful way.
The fundamentals of the Oil Market
Crude oil, also known as the “black gold,” apart from being one of the world’s most demanded commodities, it is also extremely important to the global economy, as its price affects the economic ecosystem at every level. We all use it, or its byproducts, on a daily basis. Whether you drive your car to work, you cook or heat your house – oil stands at the core of many activities from our modern days.
As a trader, you will need to stay informed about all the variables that contribute to this market and drive its prices. While there are numerous factors you should consider when trading crude oil, these are the most important ones:
- The supply and demand for crude oil
Knowing the balance between supply and demand plays a big part in your fundamental & technical analysis. Try to stay informed and devour all the available data from trustworthy sources like the U.S. Energy Information Administration (EIA). Don’t hesitate to compare past information with current one; it might help you more than you think.
- The Organization of the Petroleum Exporting Countries (OPEC)
The OPEC has 14 member states (as of January 2019) which account for 40% of the world’s crude oil and the organization has a decisive control over the oil production. It is mandatory to check all the news related and updates about this organization.
- The crude oil benchmarks
Benchmarks are not to be missed when you trade this asset, because they serve as a reference price for buyers and sellers. The three main oil benchmarks are the West Texas Intermediate (WTI) Crude, the Brent Blend Crude, and the Dubai Crude. The first two benchmarks are often compared and their price difference is known as the Brent-WTI spread.
- Economic and geopolitical variables
This one should be no surprise, as the economic health of the crude oil producing countries and their political relations to other countries are always two of the major things that can drive the oil prices.
- The weather conditions and natural disasters
In some seasons, like summer and winter, the demand for oil usually increases, which will boost the oil prices. Natural catastrophes can also derange the natural course of the market when they happen, especially when they take place in countries of great importance to the industry, like the U.S.
How to trade crude oil
To trade this valuable commodity you need a licensed online broker to provide you with access to the market through a contract for difference (CFD) and the proper trading environment to execute your trades. TradeFw.com is a licensed and fully compliant with the Markets in Financial Instruments Directive (MiFID) commodities broker. It offers you an advanced platform geared with modern tools, two account types and a dedicated support team.
Once you’ve opened an account with a broker, here’s a brief guide of what you need to know and do as a beginner:
- The crude oil ticker symbol is CL, the price is quoted in U.S. dollars per barrel (e.g. $50.00 per barrel), and the tick size is $0.01 per barrel ($10.00 per contract).
- The hours when you can trade this commodity aren’t limited, but 8:50 am EST (New York Time) – 10:30 am EST is the prime time.
- Create a trading plan, set daily objectives and don’t go beyond them.
- Allow a fixed budget for each trade.
- Create a risk management plan – set stop loss and take profit orders.
- Don’t be greedy and overtrade! The crude oil market’s volatility can result in consecutive gains, but it can quickly consolidate and take back your gains.
In terms of what strategies to use when trading this commodity, the fundamental and the technical analysis are somehow mandatory. Scalping, which implies taking advantage of small price gaps created by the bid-ask spread, can also be an effective method.
The pros and cons of Oil Trading
Trading crude oil comes with an overwhelming potential of making outstanding profits. It is a volatile market; it typically reacts very well to pivot points and support & resistance levels, and prices fluctuate on a daily basis allowing you to succeed as a swing or day trader approaching a variety of strategies.
On the other hand, the same thing that can bring you profit can also make you lose a lot of capital. When dealing with such a volatile and active market, it is for the best to use stop loss/take profit orders to avoid any unpleasant situations.
Crude oil is a major component of the world’s economy and it should be an indispensable commodity to the portfolio of any trader. Information, discipline and caution are some of the main ingredients to succeed in this overwhelming market. If you follow the steps enunciated in this brief guide, you’re off to a great start!
Disclaimer: This content does not necessarily represent the views of IWB.