Oil is one of the most volatile commodities to trade. Its price can rise and drop based on an influential person’s comments or sudden economic news that may seem unrelated to the commodity itself. That said, it is possible to trade oil successfully. All you need is to understand a few core basics, then work on building trading experience over time.
In the follow-up sections are some key factors to consider when oil trading to increase your odds of success. Please note that there are no guarantees in trading, but a better-informed trader has a higher chance of success.
Master the art of risk management
Oil is a highly volatile commodity and can change trajectory at any moment. That’s why you must employ all risk management tools you can master when you decide to engage in oil trading. Among them include keeping the amount you borrow to trade relative to your capital low. This helps reduce the risk of getting wiped out if things don’t go your way. It would help if you also used trading tools such as stop-loss, take profits, and position hedging. The goal is to try and keep your capital intact at all times.
Use a favorable broker
This is closely linked to the issue of risk management above. To use the above risk management tools, you need to trade with a broker with them. It would help if you also had a broker that gives you the best spreads in the market. The last thing you want is to trade with a broker whose interests are not aligned with yours, especially in times of high market volatility.
Your chosen broker also needs to have a highly responsive customer care department. The idea is to get real-time help when you feel like an issue with the broker could hinder your odds of success.
Keep abreast with the news
When trading oil, you must be up-to-date on the latest news. That’s because oil prices tend to be highly sensitive to news. Be updated on political news, economic news that touches on aggregate consumer demand, and oil supply cuts or increases.
Political news matters because politicians make policies that directly affect the economy. For instance, the move by Europe to scale down on Russian oil and gas purchases has led to a skyrocketing of oil prices for most of 2022.
On matters of aggregate consumer demand in the economy, oil is a crucial component in manufacturing and in everyday life, such as driving. In essence, when the news says that the global economy could slow down, all factors held constant, it could lead to a drop in oil prices due to reduced demand.
Oil supply news is probably the most important news to keep an eye on when trading. That’s because it has a direct impact on oil economics. When a major oil-producing country announces a cut in oil production, the chances are that prices will go up as demand will be chasing a lower oil supply. The reverse also holds.
Have the right mindset
Last but not least, you need to be disciplined when trading oil. Oil prices can move so fast that you may either feel inclined to close a profitable trade too early or let a loss-making one run for longer than needed. If the market conditions change and demand that you adjust your trade, you need to be able to do so without hesitation.
Oil is a highly volatile commodity and tends to be moved easily by the news. As such, when trading, it is essential to follow the news closely, use risk management tools, and ensure that the broker you are using does not have a conflict of interest in your trade. Lastly, be disciplined enough to enter and exit the market based on how the core fundamentals are moving.