Your Ultimate Guide to Crude Oil Forex Trading
Oil is among the most popular trading assets in the financial market. The high-profit potential and global demand attract people towards oil trading.
However, not many people are aware of the oil trading process in forex. So, In this blog, we will discuss crude oil forex trading with popular strategies and factors that affect it.
Here's a quick look at what you'll read
Crude Oil, also known as liquid petroleum, is formed from the remains of animals and plants. It is extracted from the earth’s surface to meet global fuel requirements.
Crude oil trading is the process of predicting the rise and fall of oil prices and making money from its price fluctuations.
Traders can trade crude oil in spot, futures, options, and forward markets.
Crude oil is mainly divided into two categories based on its origin: West Texas Intermediate Crude Oil (WTI) and Brent Crude Oil.
- Start with Learning
- Select the Trading Instruments
- Choose your FX crude oil strategy:
- Select your analysis method
- Start Placing Trades
- OPEC Announcement
- Oil Reserve, Storage, and Supply
- Geopolitical conditions and relations
- Manmade and Natural Disasters
An Introduction to Crude Forex Trading
Crude Oil, also known as liquid petroleum, is formed from the remains of animals and plants. It is extracted from the earth’s surface to meet global fuel requirements.
Crude oil is used in various industries, including transportation, heating, manufacturing, infrastructure, etc.
Crude Oil’s limited supply and infinite demand result in a significant rise and fall in its prices. As a result, traders across the world trade or invest in it.
Crude oil trading is the process of predicting the rise and fall of oil prices and making money from the fluctuations.
One can trade crude oil in spot, futures, options, and forward markets. Traders can also trade crude oil against currencies in the forex market. Let us look at a crude oil forex trading example:
Suppose the oil price is $76 per barrel. According to your analysis, oil prices are all set to rise, so you decided to open a long position in WTI/USD.
Suppose the pair price moves to $80; then your profit will be $4 per barrel or if the market price drops to $76, your loss will be $2 per barrel.
How to trade crude oil in Forex
Novice traders may experience difficulties in trading oil forex due to the vast market. So here is a step-by-step process for helping newbie to trade oil like a pro:
Start with Learning
Forex is the biggest market where you can trade a currency against other currencies, stocks, commodities, and cryptocurrencies.
Forex opens for 24 hours and five days and has four trading sessions. Traders from all over the world participate in the market and trade over the Internet, so trading in the forex market is quite different from the others.
Therefore, a trader first learns about the forex market, its workings, key concepts, tools, and other crucial aspects. Also, as you are trading oil products in the currency market, knowledge of the oil market is necessary.
Select the Trading Instruments
Crude oil is mainly divided into two categories based on its origin: West Texas Intermediate Crude Oil (WTI) and Brent Crude Oil.
WTI comes from US oil fields, mainly Texas and Louisiana. Meanwhile, Brent oil comes from the North Atlantic Sea. WTI is the benchmark for the US oil market, while Brent is for the UK region. So, now you need to select the oil category you want to trade in.
In addition, you need to select the currencies against which you want to trade oil. Also, instead of directly trading in WTI or Brent, traders can trade in the currencies of nations that positively correlate with the oil market.
Choose your FX crude oil strategy
The most important element for starting to trade crude oil FX is the right trading strategy. You can use a range of short-term and long-term strategies.
Intraday trading, buy-and-hold, scalping, swing trading, and position trading are some popular trading strategies. The right strategy selections depend on knowledge, experience, time frame, risk, trade capital, leverage, etc.
Also, try the strategy you are selecting on demo accounts first. It will help you analyze whether the strategy suits you, and how accurate it is.
Select your analysis method
Forex oil trading is based on speculations of the rise and fall of oil prices. You need to select an analysis method to identify potential fx crude oil opportunities.
Some traders use fundamental analysis, some use technical, and some use a combination of analysis methods to identify potential trading opportunities. However, conducting market analysis requires proper knowledge.
Knowledge of candlestick patterns, trend lines, indicators, tools, and charting software is essential for using technical analysis. Meanwhile, knowledge of global events and economic, social, political, supply, and demand aspects is essential for fundamental analysis. So, select the analysis method effectively.
Start Trading
You have learned about the market and selected the trading instruments, strategy, and analysis method; now it’s time for execution. If you are completely new to crude oil FX trading, start with demo trading.
Demo accounts allow traders to practice their trading strategies and analysis methods without risking a single penny. Once you are satisfied with demo trading results, you can start trading in real accounts.
However, remember, the beginning is the most crucial face of trading. So start with a small amount, follow trading rules, trade with a proper risk-to-reward ratio, and use leverage effectively.
4 Factors to watch for crude oil forex trading
Oil prices move due to different factors, and you need to monitor them to identify potential opportunities. Thus, here is a list of top factors and events to watch in order to spot buying and selling opportunities:
OPEC Announcement
The Organization of Petroleum Exporting Countries (OPEC) is an institution that manages the oil-related activities activities of oil-producing countries. The organization has 12 members, and these countries produce approximately 38% of Global oil.
In addition, approximately 80% of the oil reserve is located in OPEC countries. So, OPEC has a huge influence on the oil market and can affect oil prices by managing supplies. As a result, crude oil forex traders should keep an eye on OPEC’s policies, announcements, and activities.
Oil Reserve, Storage, and Supply
Like any other trading commodity, the oil price increases or decreases depending on supply and demand dynamics. As we have studied above, crude oil is a nonrenewable source of energy. It is available in the earth’s crust in a limited quantity and is unreplaceable.
So traders should watch the supply and demand dynamics of oil to predict the price movement. In addition, countries also have oil reserves and storage capacities that ultimately affect oil prices, so watch them.
Geopolitical conditions and relations
There are some countries with huge oil production that dominate the global oil market. So, their export and import policies, political status, diplomatic relations or ties, and government policies greatly impact oil prices.
In addition, the economic conditions of oil exporters are also important for traders. Traders should monitor factors like inflation, interest rate, trade balance, and data that can significantly impact oil prices.
Manmade and Natural Disasters
Oil is extracted from the earth’s crust, so natural factors like season and weather can directly affect oil prices. Also, natural disasters like floods, storms, earthquakes, and others can disrupt the oil supply.
In addition, conflicts, tensions, and war majorly impact oil prices. They directly affect the export and import of countries. You may have observed the impact of oil prices amid the current Middle East crisis between Iran and Israel. The conflict has given rise to many opportunities in the FX crude oil market, and traders have made a good amount by keeping an eye on it.
Wrapping Up
Crude oil forex trading is the most profitable way to make money in the market. Traders can experience high market volatility, great liquidity, and overall excellent market conditions while trading crude.
However, oil trading is quite sensitive to market change. And, when you are trading oil in the forex market, the game becomes more challenging. Thus, knowledge is the only weapon to help you stay profitable and survive in the market.
So, embrace continuous learning, analytical skills, right psychology, risk, and money management. Also, consider diversification and trading in a variety of financial assets to make maximum use of capital.