What are crude oil futures trading?
Crude oil or widely known as petroleum is an unprocessed oil that contain high level of hydrocarbon. From crude oil, petroleum products are form so many called it as petroleum. In other words, it is the foundation of the petroleum industry and can be traded as a commodity. Futures trading are basically a contractual agreement made on the trading floor of future exchange. Traders buy or sell commodities or other financial instrument at a pre-determined price in the future.
In the case of crude oil futures trading, you can utilize several exchange platform or trading floor. Some of the more common one are : New York Mercantile Exchange (NYMEX)
Intercontinental Exchange (ICE)
Multi Commodity Exchange (MCX)
Tokyo Commodity Exchange (TOCOM)
What are the common types of traders in crude oil futures trading ?
When it comes to crude oil futures trading, there are two types of investors; Hedgers or Speculators. Hedgers are the producers, suppliers … in other words those involve in the buying and selling of actual crude oil. They use hedging to protect themselves from the volatility of crude oil prices. Speculators on the other hand are those who trades the crude oil as commodities with higher risk and expecting higher returns.
Most hedgers deal with long term trading and speculators deals with short term trading. Experienced speculators anticipate crude oil price movements and trade on it in the hope of making quick large gains. The risk is definitely higher but you could reduce the risk by leveraging and practicing other good trading methods.
What are the common types of futures in crude oil futures trading?
There are several types of crude oil futures trading that you could trade in. The following are those available in NYMEX.
Light Sweet Crude Oil : Each futures contract represents 1,000 barrels, tracks WTI crude oil and quoted in USD. Brent Crude : Also represent 1,000 barrels but does not track WTI.
E-Mini Crude Oil : Represents 500 barrels per contract. Suitable for beginner traders with limited funds or just starting out in crude oil futures trading.
Crude Oil Volatility Index : These contracts are more complicated and suitable for more experienced traders.
How to participate in crude oil futures trading?
Going Solo : You can trade your own account without going through brokers. This is suitable if you are well versed in the oil markets and you have time, funds and knowledge to invest on your own. Though it means you will gain all the returns without paying out commission, it also means that you will be expose to higher risk. As an independence or solo trader, you will understand the nuances of trading from one point to another and are capable of making good analysis.
Though it can be complicated, it does not mean beginners should not participate as a solo trader. Nowadays, there are many user friendly trading platform that you could try out. Just be wary of scammers and also the laws regulating these type of trading.
Get a Broker : Start with opening a managed account. Your broker can trade on your behalf based on agreed conditions. Though it lessen the risk of trading as you will rely on professional expertise, you would still be exposed to losses, margin calls and paying extra management fees. This is suitable for any traders that need to leverage their time and other people expertise.
Join a pool – This provide the lowest risk and suitable for beginners, traders who are looking for smaller risk crude oil futures trading or those wanting to diversify their portfolio and leverage their investment funds. This is a commodity pool and works similarly like a mutual funds. The commodity pool can include other commodities as well but you can choose a pool that focuses on oil markets. Though it presents lower risk, it is important that the pool managed by experienced brokers or investment management companies. Your investment in this commodity pool is still exposed to risk.
How do you start with crude oil futures trading?
With any type of investment, you should start with a proper research. Begin with an amount that you are comfortable with until you gain more experiences. You can either invest independently, through a broker or join a commodity pool. Get as much advice as you can and practice. There will always be mistakes, even the best investors makes mistakes. So you must learn how to manage your portfolio and leverage your risk. Once you get the hang of it, crude oil futures trading can provide a good substantial income.
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