How To Trade Crude Oil Futures

For those not in the know, investing in crude oil futures might sound complicated and risky. In many ways, it can be but with a little patience and persistence, you can actually make money on investing in crude oil futures and options.

Definition

To start investing, you must understand that an oil futures option is only the right, never the obligation, to call (buy) or put (sell) a thousand barrels of crude oil at the strike price within the expiration date. You will pay a premium to be entitled to this right. Think of investing in oil futures as akin to trading in the stock markets only that the things being traded are crude oil and its distillates. Take note, too, that crude oil options are traded in barrels while heating oil futures and unleaded gas futures are traded in gallons.

How to Start Investing

You have to open an online futures trading account. Your eligibility for trading will still be assessed by the brokerage company in terms of net income, net worth, investment experience and ability to take and endure high risks for profit or loss. As such, it pays to be honest about your investment background for, indeed, investing in crude oil futures is a very risky endeavor. When your application is approved, you will then be required to deposit the minimum balance required in opening an account. You can start trading on your chosen crude oil, heating oil and unleaded gas futures.

To be successful in investing in such a high-risk field, you must do your research and technical analysis. You have many resources available in this regard starting with the weekly reports and charts published by the American Petroleum Institute. You also have to take into account the law of supply and demand, the seasonal fluctuations, the seasons of the year and, more importantly, the geopolitical situation involving the major oil-producing countries.

Your technical analysis will involve looking at the crack spread, the movement in trading volume, the convergence of short-term and long-term trends, and candlestick charting, to name a few. Most successful traders will look to the crack spread first, which is simply the relationship between one barrel of crude to its by-products and related products.

When you have chosen the crude oil contracts you want to invest in, you must deposit the initial margin amount corresponding to said contracts. You need to be updated about this amount through your futures broker since it can fluctuate wildly within a short period of time.

Based on your research, you can then determine whether to take a short or long position. We did say that you have to research about the field or else be swamped with more information than you can handle and, hence, lose more money than you can afford.

Tips on Successful Investing

As previously implied, not all investors are well-suited to investing in oil futures due to the very risky volatility of the market. As such, the best tip on investing is to always follow an entry and exit strategy. And do follow the trend as it is your friend.

Soon enough, you can make money in crude oil futures. Just learn to read the charts and reports, understand how the market works and try to rein in your greed.