Commodities are commercial products that can be found naturally in the ground or that can be agriculturally sourced, and out of these, crude oil is the most popular asset amongst investors.
The oil market has high liquidity and volatility. It is affected by the process of supply and demand and has a unique relationship with worldwide economic and political factors. With all this considered, it provides excellent opportunities for profit.
Developing an effective crude oil trading strategy is key to maximising your profit potential. The best place to start is with research. Research the market, read relevant reports, data and recent news, and find a brokage firm that suits your trading style.
From there, you can develop a trading strategy for crude oil, and here we’ll explain the main types of commodity trading strategies.
Oil trading using technical analysis
Technical indicators can be employed to analyse the previous data and market movement of crude oil, in order to make a well-educated decision on when to open and close a position on the market.
These indicators can include:
• Moving averages
• Relative strength index (RSI)
• Average true range
• Bollinger bands
• Pivot points
One strategy in particular that uses technical indicators is the range-bound trading style. This uses a chart of the market, with support and resistance levels applied, therefore providing a range in which you can open or close a market position. In its basic terms, an investor is trying to execute trades of crude oil close to the support level, the bottom of the price range, whilst selling at the resistance level, at the top of the range.
For a successful trade using this strategy, you should be able to effectively use technical indicators, such as the RSI and Stochastics, analysing the data to identify the levels of overbought and oversold market conditions.
Oil trading using fundamental analysis
When it comes to crude oil trading, technical analysis is only one part of the whole picture. As a commodity that is affected by the principles of supply and demand, fundamental analysis of macroeconomic and political events will help towards successful oil trading. One of the main tools for this strategy is an economic calendar that covers the relevant events and data releases that aid towards fundamental analysis.
For this strategy, the timing of buying and selling is important to attain the best profit, as well as keeping up to date with relevant news, both globally and regionally. As the biggest producing countries of oil, the relations and conditions between Saudi Arabia, Russia, the US, Canada and China can affect the production of oil, and therefore impact the supply end of the process.
Market sentiment should also be taken into consideration when implementing this strategy, as an overwhelming reaction from investors from a constant stream of data or breaking news, can swing oil prices from bullish to bearish, or vice-versa.
If looking at a long-term investment strategy, then analysing reports and data on the future infrastructure of oil trading, the development of finding new resources, as well as the shift to cleaner and greener energy, can indicate the plans for supply over the longer term or how it will affect demand in future years.
There are also some factors that can be unpredictable, such as the break-out of war in oil-producing countries, or most recently a worldwide pandemic. Fundamental analysis in this case where the world experienced lockdowns, should indicate that the global demand for oil will be reduced, and with a vast amount of supply, will cause prices to drastically drop.
On the other hand, in the circumstances where the supply of oil is reduced, there is the potential for a shortage in the market and therefore a rise in prices. Using fundamental analysis on these occasions will help towards making informed trading decisions on when to enter and exit the market.
Oil trading with CFDs
One option for traders, is to invest in commodities through derivatives such as Contracts for Difference (CFDs). If you trade oil on Plus500 for example, there are several features that you can take advantage of to create a successful trading strategy.
With CFD oil trading, you are able to trade on both rising and falling markets, but most importantly you can trade on margin. This means you will have a higher amount of leverage on your trade, enabling a greater exposure to the market, but depositing a lower amount of capital that equates to a percentage of the total value of the trade.
Through a CFD trading platform, an investor can have access to all the commodities from one easy-to-use account, and can speculate on the prices of not just crude oil, but gasoline, natural gas, gold and wheat, and many more.