A Beginner’s Guide to Trading in Oil
Trading crude oil has often been seen as an activity limited to City traders. This is a common misconception, however, and it is possible for ordinary investors to trade crude oil through the futures markets. Here, we will look at how to get started trading oil.
Warning: Oil trading is a highly spectulative form of investment and you should be aware of the risks it carries. Never invest more than you can afford to lose, and consult a professional if you are unsure of any aspect.
What are Futures?
Trading oil is done through buying and selling commodity futures. Crude oil and other commodities such as wheat, gold and cotton are traded every day in major financial markets such as London, New York and Frankfurt. There are hundreds of thousands of traders vying to make money from prices rising.
Futures traders, however, don’t own the commodity they are buying and selling. They are just trading the contract for crude oil or wheat. These contracts are available for several months of the year – normally, February, April, June, August, October and December and can be cancelled at anytime. They have expiry dates but you don’t have to hold onto them until they expire. Some traders sell them regularly whilst others choose to wait until the price picks up in the hope of making a larger profit.
Contracts close to expiring have more traders trading them and often have more stable prices. If you are interested in buying for the long-term, simply buy a contract for October or December. There are no limits to how many contracts you can buy, either. Remember that there must be buyers and sellers ready to trade with you.
Every contract is standardised so they all hold a specified amount and quality of a commodity. A crude oil futures contract will hold 1000 barrels of crude oil of a particular quality, for example.
Advantages
There are certain advantages trading oil has compared to traditional stock market investing.
* Fairer markets. Trading reports are released at the end of every session giving every trader a chance to take them into account before the next session.
* Futures are very liquid markets. There are vast amounts of contracts being traded every day, so you can easily buy and sell quickly.
* Smaller commission charges compared to other forms of investing.
* Futures are paper investments, so you don’t need to store any crude oil in your garage or worry about finding room for wheat bushels.
* You can make money with falling markets. Trading a PUT option, if you believe the price of crude will fall, lets you make money every time the price goes down.
* Futures are highly leveraged investments. You only need to put down a fraction (around 10%) of a contract to trade it.
* Futures markets move quicker than cash markets, letting you make potential profits quicker.
Disadvantages
There are some disadvantages to trading oil, however, and you should be aware of them before starting.
* Crude oil is highly susceptible to global events. Wars, recessions and natural disasters can make the price fall or jump very quickly. You need to be on your toes with this particular commodity.
* You can easily lose profits if the price falls. Because futures are leveraged, a 5% drop can wipe your position out.
* You need to research carefully crude oil. Trading futures without planning will greatly increase your chances of making a loss.
Getting Started
The first step is to find a good broker. Look for one regulated by the Financial Services Authority (FSA) to ensure you are dealing with a qualified firm. Ideally, they should also be members of the Futures and Options Association (FOA), an organisation designed to safeguard futures investors.
Fill out the broker’s registration forms and provide any required ID, along with proof of employment or income if needed. Look for the minimum capital required beforehand. Some brokers require a minimum of £250 – 500, others may need several thousand.
Start by paper trading and use any online virtual trading tools your broker may offer. You may want to invest in charting software to plot the commodity’s movements. Subscribe, also, to a real-time price ticker. Only start trading oil for real when you are confident and do not overstretch your resources.
Read energy magazines and check the news daily for information on the oil industry. Look for any major events which will affect the price. Good luck trading and we hope you enjoy trading futures.
A guest post by Daniel P for Sunbird CFDs online
Interesting topic. But in my opinion,in today situation becoming a oil trader is really challenging due to economic and political situation in many countries that export oil +many countries try to use renewable energy,i.e for many European countries it is the best choice as the won’t depend on such countries as Iran,Russia and etc.