Of all of the assets that you can invest in on the commodities market, oil is the most popularly traded. Oil is one of the most in-demand liquids in the world, and it’s estimated that the daily demand for the asset could increase to 96.5 million barrels per day by the end of 2021.
If you’re looking to oil as an investment to help you to reach your financial goals, then it’s good to know that it can be a great way to make returns on your capital — if you properly research the market, plan, and use technical and fundamental analysis to inform the positions you open and close.
You can find all that you need to help you to get started trading in the oil market online and can read more about how oil trading works on Plus500, for example. You can also use an online trading platform to open a demo account and practice trading, to establish what your trading style is without risking your own capital.
Once you know what your trading style is, you can start thinking about employing an oil trading strategy, and in this article, we will run through some of the best oil trading strategies for beginners.
Read on to find out more.
Oil Trading Using CFDs
One of the increasingly popular and effective ways to trade in the oil market is to use a contract for difference (CFD). A CFD is a contract that is established between a trader and an oil broker, whereby they agree to exchange the difference in the value of the investment from the point at which the contract is first opened, to its close. This means that as a trader, you are not trading directly on the underlying asset, but rather, on the value of the contract.
This means that you can also apply leverage to your trades, having the option to open a position in the oil market without having to deposit the whole value of the asset. You can pay a portion of the total value of the trade and borrow the remaining capital from the broker, meaning you can acquire a larger position than you could naturally afford using your own funds alone.
Oil Trading Using Fundamental Analysis
The value of oil can be directly impacted by a multitude of factors and therefore, it’s vital that you use fundamental analysis to inform your decisions in the market. This is the study of external factors including political and macroeconomic events that could affect the price of oil.
Many of the events that can affect oil prices are unprecedented, like the coronavirus pandemic, for example, which dramatically influenced the supply and demand of the commodity. However, many influential events are planned and take place periodically. Using an economic calendar, you can track the upcoming affairs that could trigger market volatility.
If your strategy is centered around fundamental analysis, you’ll need to effectively time the opening and closing of your positions, and keep up to date with global news that could affect trade.
Oil Trading Using Technical Analysis
If you opt for a strategy that sees you base your decisions upon past data and movements in the market, you’ll want to focus on technical analysis. This means that you’ll look at technical indicators to calculate how the market is likely to change in the future so that you have a good idea as to where the best points to open and close your next position are. These technical indicators include:
Relative strength index (RSI)
Average true range
Using the likes of stochastics and an RSI, you’ll be able to identify the points at which oil is overbought or oversold, to help you to make predictions with regards to the movement of prices in the future.
As a beginner, using a strategy when trading in the oil market could help you to stay on track and give your trading approach some direction. If you make effective decisions in the market and manipulate market volatility, you could make profits on your investment and subsequently, reach your financial goals more effectively.