Often referred to as black gold, crude oil is a very profitable commodity for traders. However, although it can be quite lucrative, trading in crude oil isn’t easy, especially if you don’t have the right information and proper strategies.
The liquidity of crude oil as a commodity, the volatility in prices, and various other factors (such as the costs of isolating Russia, one of the world’s largest oil producers) contribute to fluctuations that impact the price. Consequently, in order to make money from trading crude oil, you need to understand all the factors, as well as all the hidden pitfalls that can eat into your earnings.
To make it easier for small traders to succeed, we’ve put together four tips that will help them make money in crude oil trading.
1. Have a Trading Strategy
Creating a solid strategy is one of the first and most important steps to consider when trading in crude oil. Not having a strong plan could very easily lead to losses. Trading in crude oil is very different from investing in the stock market. In order to ensure profitability in crude oil trading, you need to have a solid knowledge of the energy sector.
It is highly recommended to work with expert market advisors that are well-informed in the global political and social-economic trends, especially in countries that export the commodity. For instance, Russia’s invasion of Ukraine caused petrol prices to hit another record high. At one point, oil spiked to $139 a barrel, reaching the highest level for almost 14 years, whereas wholesale gas prices for next-day delivery more than doubled.
Keeping an eye on such trends and knowing when drastic changes take place will help you make more informed decisions and prevent significant losses.
2. Learn how Crude Oil Moves
Crude oil moves based on supply and demand perceptions, which are influenced by global output and worldwide economic development. Traders are encouraged to sell crude oil markets when demands are shrinking and there’s oversupply while rising demand and dropping or flat output encourage traders to bid higher.
Strong uptrends can be created by a tight convergence of positive components, like the surge of oil prices to $25.9 per barrel in 2001 and $93.25 per barrel in 2014. Conversely, downtrends can be created by a tight concentration of unfavorable components, like on the day after the USA and allies launched an attack on Iraq when the oil price dropped 33% in January 1991.
3. Try different Trading Strategies
There are four top crude oil trading strategies you can try:
Buy and Hold
which is considered the best and most popular crude oil trading strategy. Traders examine supply and demand factors before taking a calculated position, and then cancel their positions to book profits before expiry if their prediction comes true.
Spread Strategy
which tends to be less risky than outright long or short trading positions. The goal is to profit from the predicted difference in both contracts’ selling and purchasing prices.
Swing Strategy
is a method in which you buy and hold a commodity for a short length of time. It can last anywhere between a few minutes to 3-4 days. To predict the market’s trend, swing traders use short-term variations in demand and supply, candlestick charts, and technical analysis.
Technical Analysis Strategy
This is a method where technical indicators such as trading volume, bar charts, and candlesticks are used by traders to forecast crude oil’s future price movement and make investment decisions.
4. Differentiate between different Types of Crude Oil
It’s crucial to understand the differences between West Texas Instrument (WTI) and Brent crude. The former is produced inland in the United States by fracking, whereas the latter is produced offshore. Due to greater WTI production and output relative to offshore Brent, the previously established price convergence between WTI and Brent has begun to diverge over the preceding decade. If you’re an investor who wants to gamble on both alternatives, you’ll need to understand their unique performance.
Final Thoughts
Whether you are a big corporation or a small trader, trading in crude oil can be highly profitable if done properly. In order to make consistent profits in the crude oil market, traders must have a remarkable skill set. Market participants interested in trading crude oil futures and derivatives must understand the physical differences across grades, the commodity’s long-term price history, what moves it, and, of course, have a solid strategy.
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