The uniqueness of oil within the world’s economies and political systems offers crude oil high liquidity and opportunities to profit in all kind of market conditions.
In recent years, the energy industry volatility has risen strongly ensuring strong trends which produce regular returns for short-term swing trades and long-term timing strategies. Wise traders take advantage of crude oil fluctuations by studying the uniqueness of these markets.
Types of Oil Traded
There is two types of oil traded:
- Brent Crude Oil: Also known as UK Crude Oil – refined in the Northwest of Europe.
- US Crude Oil: Also known as WTI (West Texas Intermediate), Nymex Crude Oil and Light Sweet Crude. It’s refined from the America’s Midwest and the Gulf of Mexico. US Crude oil is lighter than Brent crude oil.
Oil Trade with CFDs
You can trade different CFDs related to oil prices such as:
- Heating oil, which has a liquid US-based quote with several expirations
- UK Oil and Gas sector CFDs
- USA Oil and Gas sector CFDs
- Respective oil share CFDs that involve major players like Royal Dutch Shell, Tullow Oil, Statoil, Total-Fina and Exxon Mobil.
- USA Natural Gas CFDs with various expirations
CFD deals are smaller than futures markets. The smallest commodity CFD lot size for some CFD providers for US crude is 25 CFDs of 25 barrels. In the futures market, the minimum trading size is 1,000 barrels!
Trading Oil CFDs
100 barrels are equivalent to a single crude oil CFD. Therefore any dollar change in the quoted oil price equals $100 profit or loss on the CFD trade. This means $1 in the oil price can be a profit or loss of a dollar for each CFD held. Often the spread is 5 points while the limit needed to trade the CFD could be 5%. As most derivatives, oil CFDs offer a generous leverage on investment. This results in higher profits – though losses can be big too.
Trading Oil with Binary Options
This trade includes the application of short-term trading strategies using the leverage of binary options to benefit from small shifts in oil. The biggest advantage of binary options is whatever the level of volatility in the market, you can still make money. Major online brokers offer binary options on oil.
The most popular binary option oil trade is the “up and down” option. This is when you predict whether the price will rise or drop on a specific commodity. For starters, you need to identify three parts of the trade which are:
- Expiry time – this is how much of a window oil is going to have to rise or drop before expiry. After expiry, you either win or lose.
- Payout – this depends on the position and the type of binary options trading platform you are using. Normal payouts range between 70% and 85%
- Strike price – the price at which you bought in. You started on this price when you predicted whether the price will rise.
Say the strike price for oil is $35 per barrel and your investment is $1,000. You predict the price of oil will rise in the next 60 minutes – expiration time of the trade. If at the end of the expiration time (60 minutes) the price of the barrel is $36 or higher, you’ll have made $1,000 plus $850. But if the price of oil per barrel is $34 or lower, you lose your $1,000. Binary options is a straight forward system.
This type of trading allows you to speculate on the future movement of numerous financial markets with the goal of making a profit. Since spread bets prices are determined by the underlying market, you don’t need to own the underlying asset. This means you can trade on the price of crude oil without having to literally own any barrels of oil.
You can spread bet regardless the market price movement, whether up or down. There’s potential to make a profit even when the market is highly volatile. For example, go long (buy) and your profits will increase relative to any price rise. Go short (sell) and your profits will rise relative to any price fall.
Additionally, if you go long and the underlying oil price falls afterward, your losses will increase with every fall in that price. If you go short but the price goes up, you’ll earn a loss for every point the price moves against your position.
Spread Betting is a Margined Product
You only need to deposit a small percentage of the actual value of your position to gain access to the same market exposure. Likely profits and losses from the original capital expense are higher than in traditional trading. On average the margin needed to trade is between 1% and 10% of the total value of your position.
Forex Oil Trading
Forex platforms allow traders to trade oil futures without having to trade the futures individually. This avoids the hustle of taking delivery of the commodity (oil) which is a collateral of the futures trade. Since oil futures contracts are priced in dollars, oil is generally traded against the dollar. You will find a trading pair of OIL/USD in your trading platform. Similar to other pairs, you either go long or short on this pair. Trade in crude oil is different from other pairs whereby the market is limited by time on some platforms.
Example of a Forex Trade
At expiry time 13:00 GMT the old contract closing price was $45.50 per barrel and the new contract price is trading at $ 50.10. The former deal will close automatically at $ 45.50, on expiry. As a result, any profit or loss will reflect in the margin hence the free balance. You’ll have to instruct your dealer to open a new deal at $50.10 and place an amount that corresponds to the margin balance on the old deal, unless otherwise.
Crude oil and energy markets are extremely functional areas, which need excellent skills to build regular profits on speculation. People looking to trade crude oil futures and its various derivatives have to understand what triggers the commodity, character of the dominant traders, longstanding price history and physical alternatives between different grades.
Currently, 62% of the world’s accessible oil can be found in the Middle East, centered around five countries: Saudi Arabia, United Arab Emirates, Qatar, Iraq and Kuwait.
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