Trading crude oil futures

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Trading crude oil futuresTrading Crude Oil Futures

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Major news events can happen overnight that cause the price of oil to have wide swings. The same thing can happen throughout the day, whether it is due to an economic report or tensions in the Middle East. Supplies began to tighten since the early 2000’s and a tight supply situation can exacerbate price movement.

Supply and demand obviously dictate how the price will move, but this market often moves on emotion. Much of that comes from the unknown. If tensions escalate in the Middle East, there is no telling the extent of possible supply disruptions.

The reason why prices move so swiftly is that traders who have short positions in the market tend to cover quickly. In order to do this, they have to place buy orders to cover. This wave of buying is done at the same time speculators are jumping on board to establish or add to long positions. The shorts will cover quickly, because the risk is just to great if it is really a major development that could disrupt supplies.

The usual tendency is for oil prices to have a sharp spike higher on turmoil in the Middle East.

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Then prices calm down and start to move lower unless we start to see clear evidence of major supply disruptions. Identifying these waves of buying and selling are very important if you want to avoid getting whipsawed in the markets on emotions.

For the most part, crude oil tends to be a trending market. There is usually a major bias to the upside or downside. Trading from the trending side will certainly help improve your odds of success. Crude oil also tends to get stuck in prolonged ranges after a sizable move. If you can identify these ranges, there are plenty of opportunities to buy at the low end and sell at the high end. I like to trade the ranges until there is a clear breakout either way.

The value of the U. S. dollar is a major component in the price of oil. A higher dollar will put pressure on oil prices. A lower dollar helps support higher oil prices. Crude oil also tends to move closely with the stock market. A growing economy and stock market tends to support higher oil prices. However, if oil prices move to high, it can stifle the economy. At this point, oil prices tend to move opposite the stock market. This usually becomes a concern when oil moves above $100.

Daytrading Crude Oil Futures

Crude oil is one of the favorite markets of futures day traders. The market typically reacts very well to pivot points and support and resistance levels. I like to play the bounces off these levels when I see more than one of these numbers at the same level. You have to make sure you use stops in this market, as it can make very swift runs at any given time. Long time energy trader, Mark Fisher, wrote an excellent book on day trading oil futures – The Logical Trader .

There is no shortage of trading opportunities in crude oil from day to day. The market is very active and it has plenty of volume. Beware of possible overnight moves that can take you by surprise. Much of the same principles that apply to stock index futures also apply to crude oil futures. If you like trading the e-mini SP, you will probably like crude oil too.

Trading Crude Oil Futures

Trading Crude Oil Futures

Crude oil is a natural resource that is found in certain types of rock formations and, in order to obtain the maximum possible value, it needs to be refined into petroleum products of which the most widely known is gasoline. Other products include kerosene, naphtha and liquefied petroleum gas. The crude oil is extracted from the earth by drilling oil wells and the earliest of them happened in China where they used bamboo poles. In the industry, Brent Light Crude Oil and Bonny Light) are names used for different kinds of crude oil and there are also different types oil (such as light, heavy, sweet and sour). Light oil has low density and viscosity, whereas heavy oil has higher density. Sweet oil has lower sulfur content, and sour oil has excessive levels of sulfur. Light sweet crude oil is preferred by the world market because the refining process is less intensive meaning that products can be brought more quickly to market.

Like any traded commodity. crude oil has its own ticker, contract value and margin requirements for trading. You must be familiar with these important factors and know how to use them to calculate your profits and losses and be a successful trader. For instance, if you want to buy or sell a crude oil futures contract, you will see a ticker tape which shows something like this: CL8K 105.52. This actually means something like Crude Oil (CL) 2008 (8) May (K) at $105.52/barrel (105.52). Buying or selling a futures contract involves using this kind of quotation. Depending on the price, the actual value of your contract in this case is the price $105.52 multiplied by the standard quantity of 1000 barrels which works out to $105,520.00.

Commodities and Exchange

Commodities are traded on margin and the margin will depend on the exchange, the volatility of the market and the value of the contract. For instance, if you trade the above contract on the New York Mercantile Exchange (NYMEX), you may be required to put up and maintain a margin of roughly 8% which works out to around $8775.00. The margin could change if there is a change in the conditions on the market but clearly, you can obtain considerable leverage. However you should always remember that leverage is a double edged sword which can multiply both your profits and your losses. Because contracts are customized, every price movement has its own impact on value. On NYMEX, a 1? movement is the equivalent of $10.00 and you calculate the impact by taking the price movements in cents and multiplying it by $10.00. In our example, if the price moves from $105.52 to $110.52, the movement is 500? which multiplied by $10.00 gives us the change in contract value of $5,000.00.

For many years, the price of crude oil has been denominated in U. S. dollars and fluctuations in the value of the dollar have had an impact on prices and there is a move to change the basis of pricing to a basket of multiple currencies. Alternative methods of production such as hydraulic fracturing to extract more oil from shale have been remarkably successful in boosting production despite the fears of depletion. Fear of global warming because of petroleum based products has led to a greater focus on nonconventional sources of energy. However, there is nothing even remotely on the horizon that can replace crude oil and it remains the traded commodity that has the maximum impact. As long as this continues, there will be plenty of opportunities for traders to profit from the trading of crude oil futures .