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Trading oil is like trading any other financial instrument. The key to success is fundamental analysis. In this article we will look at the individual elements of a professional trading approach and show you how to trade oil as a systematic process.
Oil is a very specific commodity and plays a crucial role in the world today. The world relies on oil for energy and many other sub products, such as plastics.
To keep the global market simple, participants use the US dollar to display the price of oil.
Furthermore, the price of oil can be very volatile. You should expect large moves up and down on a regular basis.
A professional approach
Professional traders approach trading oil like any other financial instrument, such as currencies.
That’s to say they use fundamental analysis.
So, the first task is to understand why the price of oil moves. Specifically, you need to identify what factors traders look at when buying or selling oil.
Supply & demand
The fundamental driver of oil prices is global supply and demand for oil itself.
If there is high demand then prices will rise. Lower demand will result in falling prices.
There are many factors that will dictate what the future supply and demand for oil might be.
Your job as a trader is to understand these factors and react to them as they occur.
Once you understand fundamental drivers, you can then start looking for trading opportunities.
The next step is to identify the technical details of your trade.
For example, you need to know at which price you will enter the trade. In addition, you’ll need to know where to place your stop loss and take profit order.
This is where technical analysis will help you.
Remember, you just need a standard price chart to conduct technical analysis. These charts display the price of oil in the same way as currency pairs.
Once you are comfortable with your fundamental and technical approach, it’s time to look at risk management.
Risk management is the art of maximising your potential profits, while reducing your potential losses.
At its most basic level, risk management involves using stop loss and take profits orders. Employing these tools will minimise your market exposure.
There are other basic risk management rules you can follow too.
These include only trading with capital you can afford to lose – and limiting your use of leverage.
Risk management is vital when trading oil, as its a volatile instrument. Failure to follow sound risk management rules can result in large losses.
How to trade oil?
If you’re interested in trading oil, there are three concepts you need to understand to be successful.
The first is fundamentals. In other words, you need to be able to identify the reasons why the price of oil moves.
Secondly, you need to exercise good trade management with basic technical analysis.
Lastly, you need to effectively manage risk.
If you have any questions, please leave them in the comments below.