For traders, Crude Oil has always been one of the best commodities. The high volatility of this commodity makes it a great option for day traders, especially if they are looking to trade Crude Oil Futures. If you’re new to trading, you might be wondering what day trading is or what commodity futures are.
Here is a comprehensive guide to help you learn all about commodity futures and day trading crude oil futures.
What Is A Commodity Futures Contract?
Futures Contracts are agreements to make a transaction at a specific time in the future. They allow you to buy or sell anything after a specific period of time while simultaneously securing its price. Future contracts are a way for investors to secure prices for when they would eventually buy or sell something. In most cases, the price and the quantity are set at the time of the agreement and remain fixed for the duration of the agreed-upon timeline.
Similarly, a commodity futures contract deals exclusively with commodities such as agricultural goods, oil, and even silver and gold. These contracts allow buyers and sellers to have the leverage of not getting surprised by significant price changes. For example, if you enter an agreement with the supplier to buy 1000 kg of sugar at the current price of $1.8/kg in 6 months. Now, regardless of whether the price of sugar spikes up or crashes down, the trade will stand in its agreed-upon form. This method of trading keeps things stable for both buyers and sellers, and their trades are not disrupted by major price surges or drops.
An Introduction To Day Trading
The concept of day trading revolves around a fundamental concept: To open a trading position and close it within the same day or even a few seconds. Unlike the traditional trading model of investing and holding, day traders use the volatility of the market and inevitable ups and downs to make profits.
In some cases, trades only last a few seconds, as traders are ready to buy or sell a batch of security at any moment of the trading session. Usually, day traders are well-versed in events that cause a slight short-term shift in the market and utilize these ups and downs to get their returns.
Trading Crude Oil As A Commodity
Crude oil is a naturally occurring fossil fuel that comprises highly volatile liquid hydrocarbons. Due to its high volatility, it is often regarded as one of the best commodities for day trading in the US market, and around the world for that matter. Crude oil is an essential commodity that is usually high in demand globally as it is commonly consumed as a fuel and energy source. With the current open markets and access to digitalized trading, anyone can trade crude oil from the comfort of their home.
Day Trading – Crude Oil Futures
Now that we’re well-versed with the concepts of futures contracts, crude oil trades and day trading, let’s talk about day trading crude oil futures. Day trading in crude oil futures contracts refers to making trades on a short-term basis instead of evaluating the real long-term cost of crude oil.
Traders around the world know that the crude oil futures market is highly volatile, and prices fluctuate with the slightest news. Such markets are heaven for day traders as there are many short-term spikes and drops during every trading session. As such, day trading crude oil futures have gained a lot of popularity amongst short-term traders.
Benefits of Trading Crude Oil Futures
Day trading crude oil futures is a good way for investors and traders to make short-term profits on their investments. Here are some of the ways day traders can benefit from crude oil futures:
Day trading means higher profits within a short time as traders close their deals by the end of their trading sessions. When it comes to crude oil, the price can change quickly, and day traders can capitalize on fluctuations and use them to their advantage.
Day trading in crude oil futures also allows for increased liquidity, which is a plus point of this commodity. The crude oil market is one of the most active markets in the world, which allows traders to buy and sell their contracts without much hassle.
The crude oil futures market makes it easier for traders to enter and exit positions quickly. This reduces the risk of being stuck in a trade that is going downhill.
Day trading crude oil futures offers a flexible schedule for traders around the world as this commodity is usually traded throughout the day.
Leverage in crude oil trades allows traders to control larger positions with a smaller amount of investment, which means that they can amplify their profit returns.
Day trading crude oil futures can serve as a hedge against inflation and geopolitical events. This is because crude oil prices can be influenced by various factors such as demand and supply, economic conditions, politics, etc.
Trading Crude Oil Futures
In the United States of America, crude oil futures are traded on the New York Mercantile Exchange (NYME). Generally, the market opens at 6 p.m. ET and remains open for 23 hours. Two of the most commonly traded crude oil contracts are the “Crude Oil Futures Contract” (CL), which represents 1000 barrels of crude oil and the “E-mini Crude Oil Futures Contract” (QM) which is for 500 barrels of the fossil fuel.
Both of these commodities can be traded via an online broker that may require you to trade after a minimum deposit, which may go up to $ 1,000. (CL) has a tick size of 0.01 per barrel, and the value of a standard contract is $10. For (QM), the tick size is 0.025 per barrel, while the value of the contract is $12.50.
Crude Oil Trading Strategies
The crude oil market presents an enticing opportunity for engaging in short-term trading within a volatile commodity. Nevertheless, thorough preparation is key before venturing into the complexities of oil trading. You must understand the fundamental concept of this commodity and the events that may or may not alter the price.
While crude oil’s price fluctuates, it is always better to understand the cause of that fluctuation so that you can improve your predictions. This way, your short-term assumptions will be much more accurate, and you can leverage them to your advantage.
What Affects The Crude Oil Prices?
Generally, crude oil prices fluctuate with the slightest whisper of news related to petroleum. Here are some of the things that further affect the prices of crude oil:
Demand and Supply
Like most other commodities, crude oil prices are also affected by the basic economic concepts of demand and supply. The relationship between the demand and supply of crude oil is directly linked to its price. If there is a high demand but low supply, the price is likely to increase and vice versa.
The price of crude oil is also highly dependent on the relationship between different countries, especially the countries on which the supply of the world’s crude oil is dependent.
A country’s economic condition also affects the prices of most commodities, including crude oil. With an inflation spike, the prices of crude oil are also expected to increase.
Last but not least, the value of different currencies in relation to each other also impacts the price of crude oil.
Indicators For Trading Crude Oil
Before you start trading crude oil futures, it is important to understand the key indicators so that you can assess the data and make an informed decision about entering a trade. Here are three key indicators used for crude oil:
Moving Averages (MA)
Moving Average is an effective way to make a prediction before entering a trade. This indicator reflects the average price of a commodity over a specific time period. If the MA goes above the chart, a buy signal is indicated and vice versa.
Moving Average Convergence Divergence (MACD)
The MACD is a momentum indicator, and while it is not used as often by day traders, it is still an effective way to make a prediction. The MACD indicator helps identify the divergence and turns of a commodity, which can be used to make an assumption about future prices.
Relative Strength Index (RSI)
The Relative Strength Index is a common indicator that is helpful for technical analysis of a commodity’s market condition. The RSI has a scale that goes up to 100. It identifies the overbought or oversold levels of commodity where if it is more than 70, overbought is indicated. An oversold level is shown if that number is less than 30.
The Bollinger Bands are a mix of three lines that show moving averages and the standard deviation of an asset. This indicator can be used by day traders to determine market trends and make their predictions accordingly. Moreover, Bollinger Bands can also be used to determine when to avoid a commodity due to low volatility.
How do you buy crude oil futures?
In most cases, crude oil futures cannot be traded with the same broker as stocks or forex. In order to trade futures, you need to make a special account with a brokerage that specializes in futures contracts. Once you have an active account, you can start trading crude oil futures.
What are the best commodities for day trade?
Day trading depends heavily on the volatility of the market. Hence, commodities such as crude oil are great for short-term investments. Other great commodities for day trading include gold, silver, copper, coffee, and corn.
Are crude oil futures profitable?
Yes, crude oil futures trading is highly profitable, especially when it comes to day trading. Traders can make a lot of profit from volatile oil prices throughout the day. However, it is advised to be cautious and not risk the investment without any knowledge of market movements.
To sum it all up, crude oil futures trading is a great option for all the day traders. There is no doubt that a lot of profit can be made due to the high volatility of the market. If you wish to get a piece of this pie and are looking to start trading, reach out to Platinum Trading Solutions and take care of all your trading needs.