Here’s how you should get started with oil trading
Trading is often seen as a viable option to grow one’s wealth. It does, however, come with its own set of challenges.
The foremost one would be overcoming volatility within markets. With various market forces in play, a trader needs to diversify their portfolio to counter the market uncertainty.
Traders also need to be quick-thinking and know which viable assets to focus on, one of which will be commodities like oil.
Oil prices are subjected to the usual supply and demand that causes upward or downward market movements. And it’s also seen as the benchmark for market performance, since its price has a strong relationship with economic growth.
You also have the freedom of choice in trading oil as there are plenty of ways to get started with it.
How to get started on oil trading
Oil trading is no different from your usual trading process. Your journey starts with a brokerage and it’s vital that you choose a reputable broker to handle your portfolio.
IG, for example, fulfills most of the criteria we set out, including a high level of service quality and a competent team to handle your trading needs.
And like most brokers, IG lets you have a feel of the trading process with no risk through its demo account. With $200,000 of virtual credits to experiment with, the demo account adequately prepares you for the eventual real trade.
One of the key things to note about trading is knowing when to open or close your position. As such, it’s crucial that you keep a close eye on the prices.
This can be done through dedicated mobile apps. In IG’s case, its mobile app gives you access to open or close your position while you’re on the move.
More importantly, it provides timely notifications so that you’re updated on the price movements. Of course, before you even start trading, you should have a good idea of when you should stop.
Using guaranteed stop-loss orders, which sets a hard stop to your trade, is a good way to limit yourself from going beyond your means.
As we’ve laid out above, trading can be simple, if you have a clear understanding of how the platform works and the assets you’re trading on.
Knowing the factors that affect oil trading
Oil trading, as mentioned earlier, is based on a supply and demand system.
In the case of oil supply, you have to look closely at the monthly supply report by the Organization of Petroleum Exporting Countries (OPEC). This report consists of the decisions from 14 countries, including Saudi Arabia, who will determine how much oil is produced and supplied to the world.
Demand, as one can surmise, is heavily dependent on the needs of each country. In particular, the United States of America has traditionally been a huge importer of oil. As such, the US dollar has become the main currency with which oil is traded on.
With a weaker US dollar, oil prices will also see a dip which presents a good opportunity to trade on oil. That, however, will also see a rise in demand, thus bringing oil prices back up.
With the constant movement of oil prices, it’s important to know how you can benchmark and effectively use its movement to hedge your portfolio. In doing so, you are seeking a form of assurance, trading on an asset to guard against another asset that could perform unexpectedly.
You can use Brent crude and West Texas Intermediate (WTI), both of which serve as viable oil benchmarks, to give you a good gauge on how oil prices are moving. With the former, it looks at oil supply from the North Sea, whilst WTI is mainly derived from oil produced in North America.
The various ways to trade oil
Knowing the factors that affect oil prices is the basic step in your research towards oil trading. Following which, you’ll have to decide on the most comfortable and effective trading route to take when you set your eyes on the oil market.
Oil trading via CFD
Contract for difference (CFD) is great way to start oil trading, due to its relatively lower-cost method.
Oil prices, in general, are on the higher end. Between July to September 2018, the WTI has seen an upward movement for oil prices. Towards the end of September, oil prices have reached as high as US$82 per barrel as sanctions in Iran are driving concerns in the supply chain.
With oil prices moving to an all-time high since 2014, trading via CFD presents you with a lower-cost option. CFD is all about using leverage to get the same exposure as though you’re trading on the full value. That means you are only paying a fraction of the actual value.
Trading via a CFD also gives you the option to go long or short on the oil market. As mentioned, oil prices are closely tied to supply and demand, with price movements constantly in play. By going long, you could take a positive outlook to open on a low price and close on a high note.
On the flipside, being familiar with the market forces can help you identify when a market is moving downwards. Prices might keep moving lower, which presents a good opportunity to go short with the oil trade. In doing so, you “sell” the oil CFD at a high price, and “buy” when it’s low, with the price difference being your positive margin.
As always, take note that CFD is a leverage product, which will amplify both your gains and losses. Be prudent and know when you should call it a day to keep your trading portfolio healthy.
Trading with oil futures and options
It is good to also note that you are not trading directly on oil when you trade via CFDs options or futures. You trade on a contract between you and the broker on how much you are willing to buy or sell the asset. That means if you are trading into Brent oil you won’t own the particular commodity.
In the case of futures, you and your broker come to an agreement on how much oil you’re exchanging at a specified date. Note the word exchanging, because in the futures scenario, there is a buying and selling transaction involved.
In other words, you’re trading based on a predicted outcome of the oil price. With sufficient research and a good understanding of the market supply and demand, this could be a positive outcome for you.
Oil options is similar to futures. Once again, you are not holding onto the actual commodity. In the options scenario, you are buying the oil at a set price before the options expire.
For example, if the set price was at $1,000 but it rose to $1,300 before the options expire, you are still buying the asset at $1,000.
Unlike futures, you are not required to exchange, i.e. you can buy options without an obligation to sell. As such, you could potentially hold onto the asset and let it grow as time passes.
Paying attention to shares of oil companies
You might consider this as a hidden trick of sort - you can trade on oil without actually trading on the actual commodity. And we don’t mean the indirect way such as futures, options and CFDs as mentioned earlier.
Instead, put your trading capital on company shares, specifically companies’ business that have direct links to oil. Oil prices have a direct correlation to these companies. As you can surmise, so does its shares.
Safe to say, an upwards movement in oil prices will have a positive impact on the company’s shares. Conversely, when oil prices are dipping, this will also influence the share prices of the company, thus giving you a window of opportunity to go short.
General tips for oil trading
Trading with oil is an effective way to diversify your trading portfolio. Like all assets that you trade on, it’s also important to follow best trading practices.
For one, you’ll need to identify what your game plan is. This means you’ll need to know whether you are taking the trading or investing route. With the latter, you take a relatively stable approach to play the long game. But if your aim is to hit the market fast and for a short period, that brings you to the trading route.
Always read up and understand the asset you’re trading. You don’t have to be an expert and know everything about it. But you should at least have a basic understanding of how the asset works in your favour. Here’s a tip - IG has a comprehensive education resource to get you up to speed.
Choosing the right broker, as we mentioned earlier, is also crucial. Consider these points before you park your portfolio with a broker, which should at the very least have a strong service support in place.
When you’ve advanced further in the trading game, don’t be quick to dismiss a volatile market. It can work in your favour if you utilise tools such as CFD to make gains at a low cost.
Got all your theories and game plan ready? Then test it out with demo accounts, which can give you a headstart before you truly begin trading on the market.
This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2018). All views, opinions and recommendations expressed in the article are the independent opinion of GoBear and do not in any way reflect the views, opinions, endorsements or recommendations, of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes only and does not constitute any form of investment advice nor an offer or solicitation to invest in any financial instrument. No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material.