Crude oil is one of the most traded commodities throughout the world. It is a vital energy resource with a constantly rising popularity. Crude oil is used as a raw material to derive various products like plastics, gasoline, vaseline, medicines, wax, and more. It affects every country’s development somehow, which is why everyone keeps a close eye on its prices.
What is oil trading?
Oil trading represents buying and selling oil CFD, oil futures, oil indexes, and international oil assets to earn an income. Oil is a finite and essential world resource that affects world industry development. Traders like to trade oil because it is a volatile commodity that fluctuates due to supply and demand changes.
The fluctuations in the price of crude oil create attractive opportunities for traders throughout the world. But, how can you take advantage of these fluctuations for your benefit? How can you be a part of the global market where crude oil trading occurs all, and most importantly, how do you begin to trade crude oil?
What is the Oil price today?
The WTI crude oil chart is presented below:
The Brent crude oil chart is presented below:
What are the trading hours for crude oil?
For majority brokers, trading time for crude oil CFD, crude oil spot, and futures is from Sunday at 5 pm EST (22 GMT) till Friday during winter. The natural oil market closes on Friday at 4 pm EST (21 GMT) and opens on Sunday at 4 pm EST (21 GMT) during summer. The oil market is open for trading 23 hours a day, five days a week.
Let’s understand what crude oil essentially is and what makes it so important.
Unrefined fossil fuel and petroleum are what we call crude oil. It is the raw material we extract directly from the earth and is unprocessed. When diatoms (dead remains of plants and animals) buried deep into the planet decompose due to heat and pressure, crude oil is formed. This process takes millions of years, so crude oil is labeled a non-renewable commodity. Crude oil is composed of organic materials and hydrocarbon deposits. In its raw form, crude oil is not helpful. Instead, it is refined to produce products that are useful and valuable. These products are diesel, fertilizers, medicines, gasoline, petrochemicals, and more.
The International Energy Agency (IEA) declared that globally, we consume approximately 93 million oil barrels every day. This makes oil one of the critical and basic blocks of the global economy. Unlike other popular commodities like gold, oil can affect every person’s life daily. It has become one of the necessities, not solely from the trader’s point of view. Everyone from a businessman, trader, economist, and a commoner keeps an eye on its prices.
When it comes to trading, investors and traders use crude oil as a tool. They speculate the market sentiment looks for investment, diversification, and hedging opportunities with its help. In addition, some traders use its volatility to make a profit and leverage geopolitical issues as well.
What is the crude oil symbol in MT4?
The crude oil symbol in MT4 is usually WTI. However, some brokers, such as Hotforex, have crude oil symbols in MT4 as USOIL or CrudeOIL as Avatrade broker.
In MT4, some brokers have a separate group of instruments to trade oil, such as oil, energy, or commodity groups.
How to add crude oil in MT5?
You can add Crude Oil in MT5 if you go to “View” and then in “Symbols” (CTRL+U) and then unhide the Crude oil symbol. The symbol is located in the energy or commodity folder and usually is written as WTI or USOIL, CrudeOil. However, if you cannot find the crude oil symbol in MT5, remember that only your broker can add and enable trading with this asset.
Sometimes if you use a demo account, you will not find crude oil symbols. You will need to have a real live account to use the Crude Oil symbol because usually, demo accounts do not cover commodities.
What are WTI and Brent crude oil?
WTI refers to West Texas Intermediate crude oil from US oil fields. The original Brent Crude oil referred to a trading classification of sweet light crude oil extracted from the North Sea’s Brent oil field in 1976.
There are different types of WTI and Brent crude oil. For example, one famous sweet crude oil type is Bonny Light Crude Oil.
WTI Crude Oil
What is Crude Oil?
Crude oil represents a naturally, fossil, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. Crude oil can be refined to produce usable gasoline, diesel, and other petrochemicals. The most famous types of crude oils are WTI Crude Oil and Brent Crude Oil.
What is another name for crude oil?
Crude oil is another name for petroleum because this oil represents, naturally, fossil oil that comes from the ground before refining. Therefore, crude oil synonyms are crude, crude petroleum, natural oil, fossil oil, etc.
West Texas Intermediate or the WTI is considered a benchmark for oil trading on MT4 and MT5 trading platforms. The other popular option is Brent Crude. These two are the two most popular ones.
The WTI is also known as US Crude. It is regarded so highly because of its premium quality. It is exported globally. WTI is used throughout the world. It is sweet and light. It is refined in the USA and generally priced higher than its contemporary, Brent Crude, by $1-$2.
To learn how to calculate crude oil pips visit our webpage.
It is used to reference crude oil prices for sellers and buyers as an oil benchmark. The cost of WTI is quoted as the oil price in the media.
What is Brent crude oil?
Brent Crude oil represents sweet light crude oil first extracted for the first time from the North Sea’s Brent oil field in 1976. It can be primarily found in the Nort Sea, Europe, and North Africa. Brent is an acronym for Broom, Rannoch, Etive, Ness, and Tarbert – the five geological formations that form the Middle Jurassic field. The Brent Crude oil marker is also known as Brent Blend, London Brent, and Brent petroleum, and it is described as light because of its relatively low density and sweet because of its low sulfur content.
Now let us see interesting chemical facts about oil:
Sulfur in crude oil standards shows that Sulphur content varies from 0.05 to more than ten wt%. Usually, the sulfur compounds in crude oils are from 1 to 4wt%. Crude oil with less than 1 wt% sulfur is referred to as sweet oil, while above 1 wt% sulfur is referred to as sour oil.
Phosphorus in crude oil represents an undesirable compound found in oil because of anti-fouling additives or processed crude oils. Usually, phosphorus is present at small trace levels in the crude oil from 453 to 676 ppm.
Except for phosphorus, salt can be a considerable problem for oil too.
The crude oil dehydration and desalting process represents the removal of the dissolved salt and water in the crude oil and increases the grade of the crude oil. Additionally, crude oil dehydration means removing the water present in crude oil, usually to meet the purchaser’s limit. Electrical desalting of crude oil is a typical removal process of the dissolved salt in the crude oil.
North Sea Brent Crude or the Brent Crude is the next best oil to the WTI. Like the WTI, Brent Crude is also the benchmark against which other oil prices are compared.
While the WTI is extracted and refined in the United States of America, Brent Crude’s source is the North Sea, and its refining is done in Northwest Europe.
What temperature does crude oil burn at?
Crude oil burns at 225 degrees C or 440 degrees F because all mineral oils are flammable. Crude oil catches fire at this flashpoint temperature (400 degrees Fahrenheit). The flashpoint is the temperature at which a crude oil burns when exposed to an ignition source.
Combustion of crude oil is when burned crude oil releases toxic gases and high amounts of carbon dioxide. Combustion of fossil oil also creates sulfur oxides (SOx) and nitrogen oxides (NOx).
The heat capacity of crude oil is 75 kJ/kg. The average temperature drop rate of crude oil is significantly correlated with specific heat capacity. The average correlation coefficient for crude oil temperature and specific heat capacity is 0.91. Therefore, higher specific heat capacity can usually delay the cooling process of crude oil to some extent.
Interesting Oil facts
How many us gallons in a barrel of crude oil?
In a barrel of crude oil, there are 42 gallons. Petroleum refineries in the United States produce about 19 to 20 gallons of motor gasoline and 11 to 12 gallons of ultra-low sulfur distillate fuel oil from one 42-gallon barrel of crude oil.
Can the US export crude oil?
Yes, the United States export crude oil. In 2019, the United States exported crude oil to about 190 countries. US total crude oil exports were 3 MMb/d, equal to 35% of total petroleum exports.
How many crude oil refineries are in the US? There were 135 operating refineries in the US, distributed among 30 states during 2020. year.
How much crude oil is produced in the US?
In the United States, about 2.83 billion barrels (or about 7.76 million barrels per day) of crude oil were produced directly from tight oil resources during 2019. year. In 2020, production was disproportionately lower because of the pandemic situation.
Everything About the OPEC Basket
The next in line after the WTI and Brent Crude is the OPEC. The Organization of Petroleum-Exporting Countries or the OPEC is also a major global market factor for crude oil.
Unlike the WTI and Brent Crude, the OPEC does not belong to any particular place. Crude oil from seven different places together makes OPEC oil. These seven places are Saudi Arabia, Algeria, Venezuela, Mexican Isthmus, Nigeria, Dubai, and Indonesia. OPEC oil is dark in color and comparatively less sweet than WTI and Brent oil. It is cheaper than the other two oils but still plays a crucial role in the global market.
WTI vs. Brent
The difference between Brent crude and WTI crude oil is that WTI originates from US oil fields, and Brent Crude originates from oil fields in the North Sea. Usually, WTI is slightly “sweeter,” “lighter,” and lower in price than Brent.
While both the crude oil types are hailed as the top two in the market, there are a few differences between the two that you must know if you consider trading crude oil CFDs.
The difference between Brent and WTI is:
- Extraction Location: In terms of extraction, it is safe to say the WTI belongs to the US because it is majorly extracted from North Dakota, Louisiana, and Texas. Brent Crude is WTI’s European counterpart. It is extracted from the North Sea, Denmark, Germany, Belgium, Great Britain, Norway, France, and the Netherlands.
- Geopolitical Difference: In Forex, we see that the political activities directly or indirectly impact its respective currency value. The same applies to oil prices as well. These political activities can sharply influence the trading activities and the cost of that country’s oil. Since seven different regions contribute OPEC oil, geopolitical influence is more prominent.
- Composition and Content: Like any other product or commodity, the oil price is directly proportional to its quality. When we compare the quality of WTI and Brent, we mainly consider API gravity. API gravity or the American Petroleum Institute gravity measures the heaviness of oil compared to sulfur and water content. The sulfur content of WTI is 0.24%, while that of Brent is 0.37%. Lower sulfur makes oil sweeter. Therefore, it is easy to refine the more precious oil. This is why WTI is usually more expensive than Brent.
- Oil Trading Options: You can trade WTI and Brent as CFDs and futures contracts. While CFDs can be made available by the same broker, futures contracts for both the oils are managed by different exchanges. For example, the New York Mercantile Exchange operates WTI, and the Intercontinental Exchange works Brent Crude.
- Prices: In theory, quality should determine the price of oil. Since WTI offers superior quality to Brent, it is usually a dollar or two more expensive. This, however, does not always hold. In addition to the quality, there are a lot of other factors that influence oil prices. For example, the balance between demand and supply can also decide.
Factors That Affect Oil Prices
Factors affecting crude oil prices are:
- Demand (Economic growth can drive up the demand for crude oil)
- OPEC regulation (Organisation of Petroleum Exporting Countries, is a cartel made up of 14 countries that export petroleum).
- Natural disasters, war, and geopolitical instability
- Strength of the US dollar
- Market sentiment (overall attitude of oil investors toward a financial oil market)
- Key reports that affect crude oil prices in the short term
Any movement in oil prices affects the world at large. Investors, traders, entire economies, and even commoners are concerned with oil price movements. Even a slight change in crude oil price can directly or indirectly affect consumer goods’ prices. The higher the cost of the oil, the more expensive the goods will be and vice versa.
When these prices change, they make some long-term impact, like:
- When the prices rise, economic growth can get undermined. This is because products become more expensive in this case. Therefore, there are chances that the economy will see a rise in interest or inflation.
- When the prices rise, economic growth gets stimulated. This is because products become cheaper in this case. This reduces the chances of any hike in the interest rate or potential inflation.
- The above two points show that lower oil prices are better for the economy, but they should not go down a specific price point. If they go below that, supply will get affected as producers will halt oil-based projects.
The prices of oil are never stagnant. On the contrary, they can change by the day and even minute. Numerous factors affect the costs, and the most substantial ones are as follows:
- When oil producers disturb the demand-supply equilibrium.
- When the demand-supply equilibrium gets disturbed by importers and oil users.
- The total subsidies received by oil and other energy companies.
- Governments of different countries sign international agreements.
- Oil producers and their internal politics.
- Growth and development of other energy sources.
- Geopolitical tension tends to make traders insecure.
- Actual usage of oil.
You might have noticed that we have related demand and supply several times to oil prices. Do you know why? Like other consumer goods that tend to rate higher when the supply is low, and demand is low, oil prices also behave similarly. With an increase in demand, the prices also rise, and vice versa. But what affects the demand and supply of oil. Many factors can do it; the two main factors are – the level of oil production and the health of an economy. Let’s discuss the two.
How much oil is produced has a direct impact on the supply. To understand this, we need to highlight where oil is found. Out of 195 countries in the world, only 100 countries produce oil. We can say that almost 50% of the world’s entire countries depend on other countries for this energy source. Secondly, out of these 100 countries, 49.6% of the full crude oil is produced by five countries. We can see that crude oil is concentrated in five major geographical areas. This gives these oil-producing countries can manipulate the supply and distribution of crude oil. To a significant extent, they are in control of the price.
If the supply is more and the prices fall, they can slow or stop production to prevent falling further. Then, once the demand rises again and the consumers are willing to pay a reasonable price, they can increase oil production.
Laboratory distillation of crude oil
Laboratory distillation of crude oil or oil fractional distillation represents the separation of oil mixtures into fractions (oil parts) by heating components to a temperature at which fractions evaporate. So, when we increase oil temperature, different hydrocarbons will be separated.
How to remember the fractional distillation of crude oil? First, remember that fractions we can get from oil heating and fractional distillation are LPG, naphtha, gasoline, diesel, kerosene, and bitumen.
An acronym for fractional distillation of crude oil does not exist.
Crude oil tanker basics
An oil tanker represents a merchant ship intended for oil cargo transportation. There are two primary oil tankers: the crude oil tanker and the refined oil tanker. Crude oil tankers transport large quantities of unrefined oil from its extraction to the refinery. Processed oil tankers are generally much smaller, designed to transfer oil products from the refinery to the market for its use.
According to size, tankers can be divided from domestic, offshore from several thousand metric tons of carrying capacity (DWT) to massive, substantial crude oil tankers (ULCCs) with 550,000 DWT. Tankers carry approximately 2,000,000,000 metric tons (2.2 × 109 light tons) of oil each year.
Storage tankers work on a system where the level of the product fluctuates; the floating tanker roof moves up and down with it, maintaining a sliding contact with the tank wall.
Crude oil storage tank mixers work by pulsing large bursts of compressed air/gas through a series of flat round plated welded to the tank floor. Crude oil storage tank heaters represent a heating system needed at port terminals to ensure fuel and raw materials stored in tanks remain liquid. Additionally, a crude oil blending system means oil blended in the pipeline to create a crude with specific physical properties. Additionally, the crude oil blending system’s objective is to provide a blended crude oil that has a significantly higher value than the heavy raw crude.
A crude oil hydrometer represents a device for measuring oil gravity or density, and it floats inside a sample of oil taken from the separator.
The crude oil truck unloading process depends on flexible hoses at the mooring to carry the crude from the tanker into an underwater pipeline. The mooring tanker buoy and hoses can rotate through 360 degrees to allow the tanker to maintain a stable heading into the wind and waves.
Pumps used for crude oil can be:
- Centrifugal pumps.
- Oil transfer pumps.
- Diaphragm pump.
- Positive displacement pump.
- Petrochemical pump.
- Reciprocating plunger pumps.
- Gear pumps.
- Progressive cavity pumps.
- Buster pumps
Crude oil export pumps are usually centrifugal pumps. Centrifugal pumps are based on centrifugal force through the rotation of the impeller. Impeller draws fluid into the intake of the oil pump and forces it through the discharge oil pump section via centrifugal force.
The crude oil fiscal metering system represents an “oil measurement for money” system that measures mass using flowmeters or volume using volume flowmeters during oil transport. A standard oil measurement system uncertainty is ±0.25% of average volume.
Accuracy and uncertainty of crude oil fiscal metering system are based on pressure, temperature, fluid quality, flow rate, fluid composition, accuracy, installation cost, maintenance cost, etc.
What is Q88 in the crude oil business?
Q88 or Questionnaire 88 represents a risk management questionnaire created in 1988 whose main goal was assessing vessel suitability and chartering tankers’ risk. This questionnaire has been updated several times (last time in 2015.), and it offers new regulations in the oil transportation business.
Global Economic Health
The demand for crude oil derivatives like gasoline and plastics is direct oil consumption. However, its indirect consumption is also prominent. When the need for goods increases in the economy, there will be expenditure on transportation. This will increase the oil demand. In addition, the demand for goods increases when the global economy is in good health. As a result, companies will export and import goods, expanding the oil demand.
Effect of Geopolitics on Oil Prices
Five significant countries produce almost 50% of the world’s crude oil. Read more about these countries, and you will see that these are often considered essential or powerful nations. They hold power to stop or slow oil supply to other nations. A halt in the supply of crude oil has a noticeable negative impact on an economy’s health. If any conflict in these five oil-producing regions or war-like situations is created, producers and traders could be insecure. Producers and inventory keepers start hoarding oil for any unforeseen crisis, increasing oil prices.
If you plan to invest in or trade crude oil, it would be better to test the global air and read about the political and economic state.
Advantages of Trading Oil
Oil is a popular asset that is traded all over the world. Unlike Forex and crypto, most countries do not impose restrictions on their trade. There are many advantages to trading oil. Some are given below:
Volatility refers to the scale of price movements of an asset. Higher volatility can make an investment riskier, but there is no scope for profit without it. For example, oil prices see large price movements. The up and downtrend in the oil prices are substantial, making trading Brent and WTI exciting for many traders. You can leverage these price movements and make a significant profit.
Traders are always advised against investing their entire capital in one asset or security. Many people in countries like the UK, Australia, and the US invest in properties because real estate is flourishing. In other countries, people invest in stocks, shares, and more. The idea behind diversification is to protect your investment against the possible downfall of the market. While a sudden dip is unlikely, one can never be too sure. Diversification allows traders to reduce the risk involved in trading.
Investing in crude oil will also allow you to diversify your portfolio and manage risk.
3. Trade the Fundamentals
Like Forex, crude volatility is also influenced by fundamental changes in the five major oil-producing countries. If you are someone who has always struggled with technical analysis, trading crude oil will be good for you. The geopolitical situation of a country heavily influences oil prices. By keeping a close eye on the news, you can predict the direction the prices will move.
How to Invest and Trade Crude Oil
Oil trading doesn’t have to be completely virtual, unlike most other instruments. There are many ways to trade or invest in this asset. You can purchase crude oil barrels, stocks, trade oil futures, CFDs, and more. You can even invest in oil ETFs. Let’s explore these options:
1. Direct Purchase of Crude Oil
In theory, the most straightforward way to profit using crude oil would be to buy a barrel at a lower price and then sell it later when the prices are higher. However, it is not that simple. First, unlike precious metals like gold and silver, you cannot buy oil barrels in small quantities. Secondly, crude oil is highly toxic. You need a proper setup to store it. In most countries, you cannot keep oil barrels without insurance. This makes purchasing oil barrels a tedious task.
Thankfully, there are other ways in which you can trade crude oil.
2. Oil Stocks
There are many companies involved in oil production, refinement, and exploration. Instead of buying oil barrels, invest in the stocks of these companies—for example, BP. Exxon Mobil, Total SA, and Royal Dutch Shell are global companies.
The only downside or conflicting thing with investing in oil stocks is that oil prices change does not directly reflect these companies’ shares. This is because of many factors, including not investing in crude oil now. In addition, when you invest in shares, you invest in its entire value and not just its end products. Therefore, many variables affect the company’s value, unrelated to the final product, crude oil.
3. Trading Oil Futures
Trading oil futures represents trading oil contracts in which traders agree to exchange oil at a set price on a set date. Oil futures are an active, liquid, and volatile market that enables traders to trade rising and falling oil prices, reflecting the demand for different oil types.
Both Brent and WTI can be traded with the help of a specific trading option. A future contract world differently than shares and stocks. It is a legal agreement where parties agree to buy or sell a particular asset at a specified later date and a determined price before the trade begins. Futures contracts are directly impacted by any change in oil prices but remove the oil barrels’ obligation.
4. Oil ETFs
Exchange-Traded Funds or ETFs also offer an excellent oil trading option. A bundle of assets like stocks makes an ETF investment in itself. With ETFs’ help, traders get the opportunity to trade or invest in a larger market. This is because an ETF represents several instruments and not just one.
For example, if an investor is looking forward to investing in tech stocks but hasn’t extensive research on which stocks to support, they can look for a tech stock ETF. This ETF represents different tech stocks, and the investor is not expected to research anymore.
In addition to stock ETFs, there are commodity ETFs as well. For example, you can easily find crude oil ETFs that might include stocks of crude oil belonging to different companies.
Trading ETFs is similar to trading shares. You pay a fixed price when you buy an ETF and sell it later when the prices have increased. The difference between the buying and the selling prices will be your profit or loss. You can also trade via CFDs, which are derivatives of ETFs. These allow you to trade in either direction.
5. Oil CFDs
We have got you covered if you wonder how to trade oil CFDs. The contract for difference or a CFD is a tool you can use to trade price changes. It eliminates the need for physically possessing an asset. For example, you can profit on price fluctuations without buying any barrel through a crude oil CFD.
- Even without purchasing a barrel of crude oil, you can begin trading by:
- But, first, create a trading account with a broker that offers CFD trading options.
- Installing the trading platform offered by your broker on your phone or computer
- Using a demo account for practicing and then depositing funds in your live account for live trading
- We are using the same platform to open and close different trades.
Trading oil CFD is very popular, and rightly so. It offers several benefits like:
- Traders are not obligated to buy oil barrels. This is one of the biggest problems as you have to purchase a minimum of 1000 barrels.
- If you are trading oil CFDs, you get the opportunity to open both long and short positions. This means that you can take advantage of price movements in both directions.
- You can efficiently execute short-term trades. You don’t have to wait for days, weeks, or months. Instead, these trades can be completed within seconds.
- CFDs can be leveraged. This means that you can operate a sum more significant than your actual investment. For example, if your broker is offering you the leverage of 1:20, it means that you can manage $20 in the marker for every dollar you add into your account. This allows traders to make more profits even with limited investments.
- You can trade more minor contracts using CFDs. This paves the way for small investors to take advantage of crude oil volatility.
- You can trade CFDs entirely virtually. You can do it for five days every week and 24 hours a day.
How to buy WTI crude oil stock?
To buy WTI, crude oil stock traders need to track and analyze oil production, refinement, and exploration companies such as Chevron, ExxonMobil, W&T Offshore Inc., etc. For example, ExxonMobil oil producer company is also one of the world’s largest companies by revenue, with $244.3 billion.
Examples of Trading CFDs
To better understand how to trade oil CFDs, consider the following example. You will learn all about the investment required and the potential profit/loss.
- First, you need to understand the size of your trade.
- You need to understand the difference between the two types of prices: the opening and closing prices.
- Finally, check if there are additional trading costs involved.
Once you know about the above three things, trading will be easier. Talking about the first point, the trade size is measured in lots when considering CFDs. A lot is the standard contract that is related to the underlying asset. For example, in both Brent and WTI crude oil, a single lot comprises 100 barrels. So, if one barrel of the WTI crude oil is priced at $56, the entire single lot will cost you $5,600.
According to your calculations, if WTI crude oil price rises, you will buy lots and open a long trade position. On the contrary, if the prices are believed to witness a downfall, you will sell the lot and open a short trade position.
Let’s assume that you are opening a buy trade position (long position) for WTI at $56/barrel. The prices later rise to $59/barrel. Here, the difference between the opening and closing prices is $3. If you decide to close your position at this point, an entire lot of WTI CFDs will fetch you a profit of $300 ($3 x 100 barrels). The more lots you invest in, the more money you will earn.
Before you get excited, you should know that you will not get the entire $300 in most cases. In the case of CFDs, the broker will charge some additional fees. There are mainly three categories:
- And, commissions
It is the difference between an asset’s buying and selling prices. Your buying prices will always be higher than the selling prices by a small margin. Do not confuse the selling price with the $59/barrel mentioned above. It is the price at which your broker will buy back the CFDs. You will lose if you decide to sell a lot immediately after buying it.
The difference between the buying and the selling price of a lot. It can take away from your profit if you buy more lots or make larger trades. A spread is a fee or commission charged by the broker. Therefore, it is essential to look for brokers that offer tighter spreads.
Let’s assume that your broker charges $0.03 on every spread. Therefore, the total spread cost on one lot will be $3 ($0.03 x 100 barrels). This will be subtracted from your gross profit, making your final profit $297.
A swap is an interest rate adjustment. This fee is charged when you hold an overnight position. In some cases, if you have a short post, you might receive interest. This is not a fixed charge.
In addition to spreads, some brokers also charge a commission. Some brokers might only charge commission and not any fee on spreads. This commission can either be decided in percentage or dollars. There is also a minimum commission that is charged.
Oil CFDs vs. Futures
Only a few people buy physical barrels of crude oil. Therefore, investing in CFDs and futures is the most popular crude oil trading. While neither of the options gives you ownership of the asset, and you can go both long and short with these two options, there are still many differences between these two favored choices, some of them are based on the following:
Expiration Date: Futures come with monthly or quarterly expiry dates, but CFDs can go on forever if you keep renewing them.
Trade: You can trade futures via exchanges like CME, CBOT, and NYMEX. You need a counterparty for trading CFDs.
Strategies for Crude Oil Trading
The first thing that you need to do is to find a broker. Once that is done, you are required to form a beneficial strategy. Your strategy must include proper risk management. The goal is to use the volatility offered by crude oil to maximize profits. You can split most trading strategies into different time frames and styles.
Here is a brief on how you can trade CFDs on oil, based on different styles and time frames:
1. Based on Trading Styles
- You can base your strategy on fundamental analysis. As we told earlier, crude oil trading strategies take more from fundamental analysis than technical analysis because geopolitical conditions play a huge role. You should collect data from news channels, government websites, and statements released by the governments of at least five major oil-producing countries.
- One cannot wholly disregard technical analysis. You must read price charts via indicators and candlesticks and deduce them into usable information. This information will help you in locating entries and exits along. You can also check if a particular CFD is suitable for long-term investment or not.
- The following method is called wave analysis. This method promotes analyzing price patterns highlighted by charts to understand the market structure context and check if a CFD offers good trading opportunities.
2. Time Frames
- Long-term traders use daily or weekly charts.
- Middle time frames suit swing traders. It could be anywhere between 4 hours to a day.
- Intra-week traders use Mid-low charts that cover one to 4 hours.
- Intra-day traders prefer lower time frames. So they set their charts to cover 15 to 60 minutes.
- Scalpers use very low charts that cover no more than 5 minutes.
How to Combine Different Time-Frames for Trading Oil
You can apply permutation and combination when combining different time frames. However, a few varieties are favored by a majority of crude oil traders. These are the most preferred methods:
Long-Term Time Frame and Fundamental Analysis:
When looking for changes based on fundamentals, you might consider setting up a long-term time frame because these changes are not quick. As a result, you require less time to set up this combination. It is always better to use a long-term forecast with fundamentals.
Short-Term Time Frame and Fundamental Analysis:
When traders use news events and data released by the government for fundamental analysis, they look for short-term gains compared to long-term gains explained in the above point. Therefore, it is better to set a shorter time frame for quick and short trades.
Medium and Long-Term Time Frame and Wave Analysis:
Wave patterns are successful when using a 1 hour or higher chart. If you are just starting with wave analysis, using a 4 hour or higher chart would be more plausible. This is because it takes time to understand how wave analysis works. It is easier to understand its dynamics on a comparatively higher time chart. You can start with 4 hours and gradually move to even a 15-minute graph.
Medium-Term Time Frame and Technical Analysis:
You can easily use technical analysis for long-term trading. Many traders use a higher time frame, but it is more efficient with a medium-term time frame to tell you about profitable entry and exit points.
Short-Term Time Frame and Technical Analysis:
Scalpers are always looking for quick results. Therefore, they use indicators that can make calculations without human input. Since they make trades quickly, they need to watch every second’s price movements. Therefore, a short time frame will suit them.
Combination of All the Time Frames:
One great approach is not to limit your time frame. Many traders prefer combining all three methods not to restrict their time frame. This approach has a few benefits, but it is not for beginners, and it can leave you in ‘paralysis of analysis.’
Crude oil trading is prevalent and advantageous if done with a good strategy. You must ensure that the combinations of methods you are employing are complementary. Make sure that you are confident about your primary form of analysis. Yes, you will be doing fundamental and technical analysis, but you must know which one will be your first choice. Then, choose a time frame according to that.
You must also think about risk management. There are several filters and tools that you can use for it. These will tell you about profitable entry and exit points. These tools also include stop-loss, which is an important risk management tool. If you are ever unsure, do not proceed. Instead, talk to a broker or an expert.