Trading crude oil can become extremely overwhelming because of its infamous volatility, enormous market volume, and high stakes involved. Known as the “Wild West” of markets, crude oil is known for its erratic swings and huge liquidity that may be linked to extreme gains or utterly devastating losses. To many traders, the sheer complexity and volatility of crude oil make building a consistent trading strategy very hard to erect.
However, if you have proper knowledge and tools at your command, there are ways to sail through the tough market and make use of its abundant opportunities. In this paper, two major strategies of trading crude oil have been presented: fundamental and price action strategies. Once you are aware and have mastered these techniques, you would find an improvement in your trading skills, and you will confidently approach the crude oil market like a professional.
Whether you are a budding or seasoned trader, this guide helps you gain an appropriate insight into how to trade crude oil effectively. You will learn how to analyze the market fundamentals driving oil prices and use price action in coming up with informed trading decisions. Now, let us dive into the strategies that shall help you trade crude oil like a professional.
Understanding Crude Oil Markets
Crude oil is one of the most imperative commodities within the world economy. In terms of market value, it runs into trillions of dollars, and it usually attracts huge volumes as far as trade is concerned. There are two major types of crude oil mainly traded in the global markets: North Sea Brent, otherwise known as Brent, and West Texas Intermediate, WTI. Both stand as international benchmarks of high-quality light sweet crude oil; each presents different trading opportunities.
One can trade in crude oil using different instruments, either CFDs or futures contracts. Although the most traded financial instrument in many countries is CFDs, U.S. traders resort to WTI Futures, which are more widely available on platforms like the CME Globex and Intercontinental Exchange.
Fundamentals of Crude Oil Trading
What Are Market Fundamentals?
Fundamentals are issues that influence an asset’s supply and demand forces, which in part forces its pricing mechanism. In this regard, there are several fundamental drivers largely pushing up the price action for the production of crude oil; understanding those can be beneficial for traders.
Key Fundamental Drivers: Demand vs. Supply
At the very bottom line of trading crude oil is a very basic economic tenet: supply vs. demand. When demand is higher than supply, prices for oil go up. When supply outpaces demand, prices go down. This kind of relationship can be pushed and pulled by things as extreme as geopolitical events, natural disasters, or as mundane as a shift in production levels from a major oil-producing country.
One of the major reports that traders monitor is the weekly U.S. Energy Information Administration’s crude oil supplies report, which is usually issued every Wednesday. This report details the inventory levels and gives indications about possible price movements. Traders may utilize this information to rationally decide their positions; however, trading close to data releases is always risky because of associated volatility.
Crude Oil Trading Seasonality
Seasonality is another important characteristic of crude oil trading. Prices generally follow something of an expected curve over the length of time of a calendar year and often in line with seasonal demand oscillations for refined products such as gasoline and diesel.
For instance, the prices of crude oil will always trend upwards from mid-March to around mid-June because of higher demand for the refined product during summers in the Northern Hemisphere. At any one time, it would also show a fall in prices from mid-August to around mid-November due to reduced demand.
A basic seasonal trading strategy in crude oil involves buying Maya and selling October. This approach would have captured some of the largest price movements in the history of the market, although it required great patience and the ability to bear short-term volatility.
Price Action Strategy: How to Trade Oil with Precision
What is the Price Action Technique?
Price action trading is a form of trading purely by price movement action that excludes indicators or any other technical analysis tools. It applies well to very volatile markets, such as crude oil ones.
Range-based Strategy Using Price Action
A very common price action strategy used by professional traders in trading crude oil is range-bound trading. The concept here is to identify a specific range within which prices are likely to oscillate during a trading session.
For example, traders often watch the first hour of trading in the New York session (9:00 a.m. to 10:00 a.m. Eastern) in trying to identify any highs and lows that would enable them to establish the range for the rest of the session. Then they will place trades to buy at the bottom of the range and sell at the top, with stop losses placed outside the range to minimize risk.
This will be most effective during periods of high liquidity and volatility, such as in the New York session, in which price movements can easily be predicted.
Trend Following Price Action Strategy
Another highly popular approach is that of a trend-following price action strategy used to benefit from relevant price movements unfolding in one direction. Essentially, what you’re looking for in trading this style is the establishment of the continuation of a trend, either strong up or strong down, and then entering trades in the direction of that trend.
For instance, if the price of crude oil is trending upwards and has an extended positive trend, it would be a good idea to time when to enter the market—this would be when there is a short-term pullback. In doing so, the trader limits his risk while maximizing potential profit from the continuation with a stop loss just below the swing low.
The trend-following approach is especially rewarding in the crude oil markets because it has strong and long-lasting trends due to its underlying supply and demand dynamics.
Hitting at Fundamental and Price Action Strategies Combined
While on their own, fundamental and price action strategies can be just as effective, their integration will offer you the very best edge possible. Knowing what fundamental factors affect crude oil prices and timing your entries and exits using price action will put you in a position where you will have the foundations upon which to base trading decisions in a well-rounded trading approach—one that adapts to changing market conditions.
For example, you could use an EIA report to get an idea of the overall market sentiment and then implement a price action strategy to recognize particular trading opportunities within that framework. Alternatively, you might want to utilize seasonal trends to establish your long-term positioning and use price action to manage your trades on a day-to-day basis.
Conclusion
Any expert trading this crude would call for in-depth knowledge of the basic drivers and the ability to read price action to a high degree of accuracy. Mastering these two strategies should give one enough competence to negotiate volatile oil markets with confidence and increase your chances of winning.
Successful trading requires one to have not only a strategy but also the discipline regarding the adherence and adjustment to it, as may be necessary, in light of changes across market conditions. Whether supply and demand dynamics, seasonal charts, or even price action alone suffice, what ties them all together is consistency and patience into profitable, effective trading.
Now, with the information about basic and price action strategies, you have all it takes to approach crude oil trading professionally. You apply these strategies to your demo account in order to acquire some experience, and then take your trading to the next step in the real markets.
