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Learn How to Trade Crude Oil CFDs

Trade Oil CFDs

Have you ever noticed how crude oil tends to show volatile price movement? These price fluctuations make it tempting for many to trade crude oil, especially now that traders can simply trade oil (WTI) online via a simple platform. This article reviews how and why oil prices move, which factors impact oil price, how traders can trade oil/WTI, the risks involved with trading oil/WTI, and the strategies for trading WTI charts.

The Basics of Crude Oil Commodities

Crude oil is unrefined petroleum and fossil fuel. It is composed of hydrocarbon deposits and other organic materials, and can be refined to produce usable products such as gasoline, diesel, petrochemicals (such as plastics), fertilisers, and even medicines. Oil is a basic and critical component in the global economy, which is why it has a large impact on our daily lives, and why it is closely followed by economists, businesses, and traders alike. Therefore the price movement of oil is important. When oil becomes more expensive, it raises the costs for consumers directly (oil at the gas station) and indirectly (products made by oil, or used by companies to produce). Cheaper oil indicates lower costs for consumers.

Here is the long-term impact:

  • Higher oil prices tend to make products more expensive, which in turn undermines economic growth, as it creates potential for inflation and interest rate hikes.
  • Lower oil prices tend to make products more affordable, which in turn stimulates economic growth, as it reduces the potential for inflation and interest rate hikes.
  • Very low prices could lower the supply, as producers may cut their current production or suspend new oil projects.

Oil prices are frequently changing and fluctuating day by day, minute by minute. The prices are influenced by a wide range of factors.

Here are the main ones to consider:

  • Increase or decrease in supply by the oil producers
  • Increase or decrease in demand by the oil users and importers
  • Subsidies for oil companies or other energy companies
  • International politics (agreements made between countries)
  • Internal politics of an oil producer
  • World wide supply of oil
  • Competition from other energy sources
  • Geopolitical tensions and insecurity (tends to increase prices)
  • Usage of oil and its fundamental outlook

You might be wondering how does supply and demand impact price? In general, higher supply and lower demand reduces prices, whereas, lower supply and higher demand increases prices. That being said, there are two main factors that impact supply and demand. Let's review them.

Point 1 Supply: oil production levels:

Oil is a resource that is not located in every country, and hence the production of oil is concentrated. Oil is produced in 100 countries, which is about half of the world. Five of those countries generate 48% of the world's total crude oil production. This gives these oil producing countries and oil associations (such as Opec) more power to control their supply and impact price. They can decrease their oil production to stop prices from falling, or to help increase them. They can increase their oil production if they believe the price is good (i.e. expensive enough) to sell and make a profit.

Point 2 Demand: health of the global economy:

Demand for oil grows when the global economy is performing well, because consumers are buying more products (where oil is often used for creating goods), companies are shipping and transporting more goods (due to higher demand), companies are investing more (to create enough capacity), and within the business world, consumers are travelling more for business and leisure. A weakening global economy has the opposite effect, and decreases demand for oil.

Trading Crude Oil Commodity

Like with all other types of trading, traders need to take risks in order to make profits, and in that process are able to lose their trading capital. In exchange for that risk however, a trader has the opportunity to earn profits via the price movements in oil by:

  • Buying and selling higher (long setup)

Or

  • Selling and buying lower (short setup).

Traders can use various forms of fundamental, wave, and technical analysis to increase their chances of success, and their ability to earn profits. But keep in mind that each trade can end up as a win or loss, and there is never a guarantee as to how prices will behave and move.

How do you trade oil (WTI)?

Oil can be traded online, and you can open a Demo account or a live trading account to do so. Traders use trading platforms such as MetaTrader 4 (MT4) or MetaTrader 5 (MT5) to enter, manage, and close setups. The good news is that you will not physically receive the crude oil yourself, and traders can instead buy and sell oil (WTI) CFDs through online trading. Admiral Markets offers the ability to trade on MT4 and MT5, as well as, through MetaTrader WebTrader (for traders who want to avoid downloading any software, and instead use their web browsers for trading). Admiral Markets also provides MetaTrader Supreme Edition, a plugin for MT4 and MT5 which enhances the trader's experience by providing a range of additional tools such as: The 'Mini Terminal', the 'Tick Chart Trader', access to news in real-time, and much more.

What is a CFD?

CFD stands for contract for difference. It allows you to trade price changes in oil futures and options, but without the need to handle contracts. This in turn offers the benefits to traders, that you can use a single trading platform for trading oil (WTI) and other financial markets.

What is WTI?

WTI stands for West Texas Intermediate. This is one of the two most popular and well known benchmarks for trading oil on MT4. The second is Brent Crude.

How do I start?

Here are the first three steps involved with online oil trading:

  1. Create an account
  2. Choose your trading platform
  3. Start trading

What are the benefits of trading crude oil (WTI)?

Trading WTI CFD offers multiple benefits, but the volatility (large price movements) are probably its best advantage. The oil price tends to move up and down with substantial swings (as traders can see on the chart below). The price movement offers the potential for traders to capitalize on these movements through intra-day trading, intra-week trading or swing trading.

MetaTrader 5

Source: Admiral Markets MT5 with MT5SE Add-on WTI CFD from 5 January 2017 to 12 September 2018 - performed on 12 September 2018 at 5:00 PM GMT

Strategies for Trading Oil (WTI CFD)

After finding a broker that will enable you to engage in online oil trading, it is best to think about how to trade oil (WTI) from a strategic perspective. It is critical to implement proper risk management when trading, but it is also valuable to apply specific oil trading strategies. Most trading methods can be split into different styles and time frames.

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

  • Trading styles
    1. Fundamental analysis: reading, analysing and using data, news, and statements to make assessments about future supply and demand.
    2. Technical analysis: this technique analyses price charts via candlesticks (or bars) and indicators to pinpoint trade setups that offer higher probability and a positive expected equity curve in the long-term.
    3. Wave analysis: this method analyses price patterns on the chart to understand the context, market structure, and whether there are any trading opportunities.
  • Time frames
    1. Long-term traders use higher time frames such as weekly or daily charts.
    2. Swing traders use middle time frames such as 4 hour and daily charts.
    3. Intra-week traders use mid-low charts like 1 hour and 4 hour charts.
    4. Intra-day traders use lower time frames such as 15 and 60 minute charts.
    5. Scalpers use very low charts like 1 and 5 minute charts.

Although traders can combine all time frames and styles for a long list of combinations, a couple of them that are more common.

Let's review the usual methods:

  • Fundamental and long-term: when traders trade WTI using fundamental analysis, they can use long-term forecasts to setup a long-term trade on higher time frames - if it's available. Fundamental changes are slower, so there will be less trade setups with this style, but it also requires less time.
  • Fundamental and short-term: when traders use data releases and news events for trading purposes, they usually focus on short and quick trade setups, which are done on lower time frames. These types of traders will use specific tools in which provide economic announcements, forecasts, predictions and more. Admiral Markets provides a 'Forex Calendar' which provides this type of information.
  • Wave analysis and medium + long-term: wave patterns are most useful for trading on 1 hour charts or higher. When you start using this type of analysis, it might be more effective to initially focus on the 4 hour charts and higher. The reason is that interpreting wave patterns takes experience, and it is easier to understand and interpret the dynamics of a higher time frame chart, in comparison with a fast moving one such as a 15 minute graph.
  • Technical analysis and medium-term: technical analysis can be used for long-term trading and higher time frame charts, but is more often used for quick entries and exits. Traders can also use technical tools to create a more robust trading plan. Tools often include trend lines, moving averages, Fibonacci, and oscillators.
  • Technical analysis and short-term: scalpers are more inclined to use trading indicators that make calculations automatically. They tend to use indicators such as the Parabolic, Keltner Channel, and Pivot Points, rather than manual tools such as trend lines and Fibonacci, because the price moves quickly on lower time frames, and decisions need to be made equally fast.
  • Combination of all three: some traders do not want to limit themselves and like to combine all three methods in a grand approach. Although there is some benefit in traders picking up different views, there is also the risk that they get stuck in "paralysis of analysis" and find themselves being unable to make a decision.

Trading plan: as you can see, these elements can be combined to form trading strategies. Trading systems usually include a list of key components such as:

  • The form of analysis
  • Time frames
  • Risk management approach
  • Entry methods
  • Filters (reasons not to enter)
  • Trade management (including market exit and trail stop loss)
  • Exit methods (including stop loss and potential targets)
  • Feedback and evaluations

Although this might seem like a long list, it is worthwhile to carefully consider all aspects before trading, as it helps traders build a more consistent approach for the long-term.

Trading strategy example:

Here is an example of a discretionary trading approach using technical analysis on a WTI CFD 4-hour chart. Keep in mind that this just a simple example of how traders could combine different tools and indicators to form trading decisions. This trading method has not been tested in real trading, and traders should only use it for example purposes. Let's take a look at this example strategy which is based on single time frame analysis (4 hour chart) using the MT5 platform, and the MetaTrader Supreme Edition plugin.

Add the following tools to your MT4 or MT5 platform:

  • 100 ema (moving average) close
  • Keltner channel from the MetaTrader Supreme Edition plugin
  • Fractal indicator

MetaTrader 5

Source: Admiral Markets MT5 with MT5SE Add-on WTI CFD from 17 August 2018 to 12 September 2018 - performed on 12 September 2018 at 5:00 PM GMT

Here is the sequence of steps:

  • Analysis: trade with the trend by using the moving average:
    1. Longs above the 100 ema close.
    2. Shorts below the 100 ema close.
  • Entry method: breakout.
    1. Breakout with a candlestick close above the Keltner channel resistance for long setups.
    2. Breakout with a candlestick close below Keltner channel support for short setups.
  • Stop loss:
    1. Traders can use stop loss above or below the closest fractal, the 2nd candle low or high, or the nearest closed candle low or high.
    2. New setups are available after the price retraces back into the Keltner channel.
  • Trade management: use a trail stop loss and move to break even once the trade has reached at least a 1 to 1 reward to risk ratio.
  • Exit method: aim at a recent top or bottom (using the same rule in filter). Or aim at weekly Pivot Points.

MetaTrader 5

Source: Admiral Markets MT5 with MT5SE Add-on WTI CFD from 5 June 2018 to 3 July 2018 - performed on 12 September 2018 at 5:00 PM GMT

MetaTrader 5

Source: Admiral Markets MT5 with MT5SE Add-on WTI CFD from 5 January 2017 to 12 September 2018 - performed on 12 September 2018 at 5:00 PM GMT

The most difficult part is perhaps the idea for filtering out setups, which tries to avoid setups that are too close to recent support or resistance.

Here is how traders can do it:

  • Use long-term moving averages:
    • Do not enter short setups if the price is above a long-term moving average.
    • Do not enter long setups if the price is above a short-term moving average.
  • Use control + Y to add horizontal levels. Check the tops and bottoms of the last 2 time zones and place the horizontal trend lines there.
    • Make sure that the space between entry and top or bottom (reward potential) is not smaller than the stop loss size, which is entry versus stop loss placement (risk).

MetaTrader 5

Source: Admiral Markets MT5 with MT5SE Add-on WTI CFD from 11 January 2018 to 8 February 2018 - performed on 12 September 2018 at 5:00 PM GMT

Once again, this is not a complete trading system, but just a combination of tools and indicators that demonstrate how traders could build a trading system. Always keep in mind that all of these ideas should be tested on a demo account first.

The Best Platform for Trading Oil / WTI CFD

The best trading platform for trading crude oil or WTI is arguably the MT5 Supreme Edition. The MetaTrader (MT) platform offers a charting platform that is easy to use and navigate. Traders can view the WTI instrument, and a wide range of other financial instruments, including Forex, CFDs, CFDs on commodities, and stock indices. The Supreme Edition plugin from Admiral Markets offers a long list of extra indicators and tools that are not a standard part of the usual MetaTrader package. The additional features include, but are not limited to, the sentiment trader, the mini terminal, the trade terminal, the tick chart trader, the trading simulator, mini charts perfect for multiple time frame analysis, and an extra indicator package including Pivot Points and the Keltner Channel.

MetaTrader Supreme Edition

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.


Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.