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.
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:
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:
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.
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:
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.
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.
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.
Here are the first three steps involved with online oil trading:
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.
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:
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:
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:
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:
Here is the sequence of steps:
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:
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 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.
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.