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Oil Trading

15.09.2020

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How to invest in oil via CFDs

Many investors follow the evolution of oil in the stock market, but did you know that oil is one of the raw materials that professional traders are most interested in?

This is simply because the WTI and Brent CFDs provide market volatility that is highly regarded by both intraday and swing traders.

These fluctuations draw the attention of many traders to this type of raw materials, and especially now that traders can simply trade oil (WTI) online through a simple trading platform.

In this article, you will learn:

  • How the price of oil affects the stock market
  • How and why the oil price changes
  • What factors influence oil prices?
  • How to invest in oil
  • Risks associated with this asset
  • Trading strategies for investing in oil via CFDs

Crude oil – definition of crude oil

Crude oil is crude oil and fossil fuels and is made up of deposits of hydrocarbons and other organic materials and can be processed to produce useful products such as gasoline, diesel, petrochemicals (such as plastics), fertilizers, and even medicines.

Oil is a major and essential component of the global economy and has a great impact on our daily lives and is therefore closely watched by economists, businessmen, and traders. But how does the price of oil affect the stock market?

The evolution of crude oil prices is very important:

  • When oil becomes more expensive, it directly reduces the purchasing power of consumers and indirectly increases the value of products made from oil or used by companies to produce them.
  • On the other hand, cheap oil contributes to the purchasing power of consumers.

Long term:

  • Higher oil prices tend to increase the cost of petroleum products, which in turn undermines economic growth as it creates the potential for inflation and higher interest rates.
  • Lower oil prices tend to make food more affordable, which in turn stimulates economic growth as it reduces the likelihood of inflation and higher interest rates.
  • Very low prices can reduce supply as producers can cut their current production or suspend new oil projects.

Oil prices change and fluctuate daily and every minute and are influenced by a wide range of factors.

Let’s consider the main ones:

  • Increase or decrease in supply from oil producers
  • Increase or decrease in demand from users and importers of oil
  • Subsidies for oil companies or other energy companies
  • International politics (agreements between countries)
  • Domestic policy of the oil producer
  • World oil supplies
  • Competition from other energy sources
  • Geopolitical tensions and insecurity (tends to rise in prices)
  • Prospects for the use of this type of raw material

Also, you might be wondering how supply and demand affect the price. In general, higher supply and lower demand push prices down, while lower supply and higher demand drive them up. However, there are two main factors that influence supply and demand. Let’s take a look at them.

Factor No. 1 – Level of world oil supplies

They can reduce oil production to stem the fall in prices or help raise them. They can also increase oil production if they believe that the price is good (that is, high enough) to sell it and make a profit.
Five of these countries produce 48% of the world’s crude oil production. This gives these oil-producing countries and oil associations (such as Opec) more control over their supply and influences the price. Oil is a resource that is not available in every country, and hence oil is only produced in certain locations. Oil is produced in 100 countries, that is, in about half of the world

We can understand this better if we consider the situation of the price war between Russia and Saudi Arabia as an example. Given Russia’s refusal to cut production to raise the price of oil (it suffers from a decline due to the coronavirus), Saudi Arabia has decided to lower the price per barrel and thus regain its market share. This caused an even larger drop in oil prices, which we will explain later. Will this give a good opportunity to invest in oil on the stock exchange?

Factor 2 – Demand: the health of the global economy

A weakening global economy has the opposite effect and reduces oil demand. Price fluctuations occur accordingly. Oil demand rises when the global economy is doing well because consumers buy more products (where oil is often used to create goods), companies send and transport more goods (due to higher demand), companies invest more (to build sufficient capacity ), and in the business world, consumers are making more business and leisure travel.

Crude oil on the exchange – Types of oil

  • WTI stands for West Texas Intermediate.

It is one of the two most popular and well-known crude oils.

  • Brent is the name of oil produced in the North Sea.

Oil trading on the exchange

As with all other types of trading, traders must take risks to make a profit, and in the process, they can lose their trading capital. However, in exchange for this risk, a trader has the opportunity to profit from changes in oil prices in the following ways:

  • Buy oil and sell it at a higher price (this is called a long position).
  • Trade oil CFDs, that is, sell at a high price and then buy at a lower price (this is called a short position).

Traders can use various forms of fundamental, wave, and technical analysis to increase your chances of success and your ability to make a profit. But keep in mind that every CFD trade can end up winning or losing, and there is no guarantee as to how prices will behave or which direction to move.

As we saw earlier, you can trade oil by opening buy or sell trades through CFDs. It allows you to trade price changes for futures and options for oil. This, in turn, gives traders the advantage of being able to use a single trading platform to trade oil (WTI) and other products.

Investing in Oil – Swing Trading

If you have a very busy schedule, swing trading is the best way to trade oil.

You only need to analyze the chart for a few minutes a week and stay on top of the latest news to better manage your risk. This approach has significant cost and time savings over sitting for a long time at the screen and waiting for some performance.

Likewise, trading activity becomes more comfortable for those who do not need to worry about opening positions overnight.

To analyze the markets, you only need to study the daily and weekly oil charts.

How to Invest in Oil in the Short Term – Scalping and Day Trading

If you have a part-time job or can focus on trading all day long, then day trading and scalping may be an alternative for you.

You open a trade at a specific time of the day and close it at the latest by the end of the session. In this case, the timeframes will be smaller – hourly charts for day trading and minute charts for scalping.

This approach obviously requires careful monitoring. economic calendar, in particular, trading hours.

For example, off-peak hours such as 12:00 should be avoided for the obvious reason that there is no movement since most market participants are not trading at that particular time.

Let’s now look at some trading strategy you can use to take advantage of the volatility of black gold!

Oil Investments – Strategies

Once you find a broker who will allow you to participate in online trading oil, it is best to think about how to trade oil (WTI) from a strategic point of view. It is very important to properly manage the risks when trading, but it is also important to apply specific oil trading strategies. Most of the trading methods can be divided into different styles and timeframes.

Here is a rundown of the main methods of trading CFDs on oil, commodities, and other products and financial instruments:

Trading Styles

  • Fundamental Analysis: Reading, analyzing, and using data, news, and statements to assess future supply and demand
  • Technical Analysis: This method analyzes price charts through candles (or bars) and indicators to pinpoint trade setups that offer a higher probability of profit and capital gains in the long run.
  • Wave analysis: This method analyzes price patterns on a chart to understand the context, market structure, and the presence of trading opportunities.

While traders can combine any timeframe and style for a long list of combinations, a couple of them are more common. Let’s take a look at the usual methods:

  • Fundamental and Long-term: When traders trade WTI using fundamental analysis, they can use long-term forecasts to set up long-term trading on higher timeframes – if available.

Fundamental changes are slower, so there will be fewer trade setups with this style of trading, but it will also take less time.

  • Fundamental and Short-Term: When traders are guided by news in building a trading strategy, they usually focus on short and fast trading setups that are executed on lower time frames.
  • Wave analysis and medium and long-term periods: wave patterns most useful for trading on 1-hour charts or higher. When you start using this type of analysis, it may be more effective to work with 4-hour charts (and more).

The reason is that it takes experience to interpret wave patterns and it is easier to understand and interpret the dynamics of a chart with longer time frames and compared to a fast-moving chart such as a 15-minute chart.

  • Medium-term technical analysis: Technical analysis can be used for long-term trading and charts with large time frames, but is more commonly used for quick entries and exits. Traders can also use technical indicators to create a more reliable trading plan, such as trend lines, moving averages, Fibonacci oscillator…
  • Technical analysis and short-term: scalpers are more likely to use trading indicators that perform calculations automatically. They use indicators such as Parabolic SAR, Keltner channel, and Pivot points rather than manual indicators such as trend lines and Fibonacci because the price moves quickly on smaller timeframes and decisions must be made equally quickly.

Combination of all three: Some traders do not want to limit themselves and prefer to combine all three methods into a general approach. While traders have some benefit in choosing different points of view, there is also the risk of too much analytic data and traders being unable to make decisions in time.

Oil on the Stock Exchange – The Benefits of Investing

There are many advantages to trading oil CFDs, but volatility (large price swings) is probably the best one. The oil price tends to move up and down with significant fluctuations.

Price movements enable traders to capitalize on this through intraday trading, into weekly trading, or swing trading.

Investing in oil on the stock exchange – Conclusion

As we learned in this article, oil is one of the most traded commodities for traders, mainly because of its volatility.

This volatility is due to the fact that oil prices fluctuate and often fluctuate from day to day, minute by minute. These prices are influenced by several factors that need to be considered, primarily political decisions. This is why you should follow the economic calendar before deciding to invest in oil in the stock market.

Be sure to practice on a demo account before you start trading on the live markets. You will find yourself in a risk-free environment where you can test your strategies. It’s completely free!

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