06 May 2020 | AtoZMarkets – For over 100 years, technologies have shifted from coal to use crude oil as a significant energy source. Therefore, people started to use various commodity products, including gasoline, plastics, medicines, and more. Consequently, the price movement of crude oil becomes valuable among people.
In this way, crude oil trading becomes very popular. Therefore, lots of forex brokers allow commodity trading besides traditional currency trading. Moreover, the introduction of CFD trading enables retail traders to get them involved in the commodity market.
The crude oil trading is now a way to make money from home. Retail traders have to follow the footprints of big investors by doing technical and fundamental analysis.
At first, let's see what the crude oil is.
What is Crude oil?
WTI is the short form of West Texas Intermediate. It is also referred to as US Crude. It is one of the essential and well-known benchmarks for trading oil on MT4 and MT5 trading platform. The second one is Brent Crude oil.
WTI is a high-quality oil that is used in most of the countries in the world. It is a light and sweet crude oil and usually priced for $1 to $2 higher than Brent Crude oil.
WTI also works as an oil benchmark, which means this price serves as a reference for crude oil buyers and sellers. Moreover, the media also use this price to quote the oil price.
On the other hand, Brent crude refers to North Sea Brent crude. It is the second-largest benchmark for oil trading. Besides WTI, Brent crude serves as a benchmark to determine oil prices.
Brent crude oil extracts from the North Sea and refines in Northwest Europe. It is a primary oil type in North Africa and Europe.
On the other hand, OPEC oil is another benchmark in the global oil market. OPEC (Organization of Petroleum-Exporting Countries) is one of the key players in the worldwide oil industry.
OPEC oil combines with seven different types of crude oil that comes from Saudi Arabia, Nigeria, Indonesia, Dubai, Algeria, Venezuela, and Mexican Isthmus. This oil is less sweet and darker than WTI and Brent crude. Therefore, OPEC oil is usually cheaper, but it remains vital to the global market.
What are CFDs?
CFD is the short form of ''Contract for Difference''. It is a contract to exchange the difference in the value of a trading instrument from the contract open to close.
So what is the meaning of CFD trading?
To understand CFD trading, the best option to start is with the traditional investing system. If you want to invest in a company, you should buy some shares at the current share price. Similarly, if you wanted to spend oil, you should buy a barrel of oil. Therefore, you need to wait for the price to increase. Later on, you would sell oil at a higher price and make profits on the difference.
In CFD trading, the system of making a profit is almost the same. You need to open a trade on a trading instrument at a particular price and wait for the price to increase or decrease. Therefore, you can make a profit or a loss on the difference.
However, the most significant difference between CFD trading and ordinary investing is that you don't have to own the asset in CFD trading. Instead of owning, a CFD focuses on the price of the particular asset rather than buying it. Therefore, you can speculate how the price of the asset changes.
How to Trade Crude Oil CFDs?
For retail investors, the widely accepted option for trading crude oil is trading via CFDs. As we know, CFD stands for a contract for difference. Therefore, it is a tool that allows you to trade on price changes in crude oil without handling physical contracts or investing in the physical asset.
Instead, you can start crude oil CFDs by following these steps:
- Open an account in a forex broker that allows you to trade CFDs.
- Verify your account with the required document and download and install the trading platform.
- Deposit funds into your account for live trading, or (you can do practice with a demo account with the virtual dollar).
- Anticipate the oil price using technical and fundamental analysis.
- Take a long or short position in the oil and wait for the price to hit the take profit or stop loss.
- Make sure to use appropriate risk management in your trading fund to secure the investment from uncertainty.
Why Should You Trade Crude Oil CFDs?
The benefit of trading crude oil CFD is mentioned below:
- You can trade oil markets without investing in physical barrels of oil.
- You can trade both long (buy) or short (sell). It means you can potentially make a profit in both bullish and bearish markets.
- You can perform short-term scaling trades where your trades are executed in less than a second.
- You can boost your balance as CFDs are leveraged profits. It means you can trade with a smaller amount as if your investment is ten or even 100 times bigger,
- Besides oil trading, you can trade forex, stocks, cryptocurrencies, ETFs from a single trading platform.
- You have the option to trade with smaller contract sizes. For example, a standard futures contract means 1,000 barrels of oil. On the other hand, one lot standard CFD contract is 100 barrels where 0.1 lot size is for just 10 barrels of oil.
- You can trade 24 hours a day and five days a week.
- You can diversify your portfolio without changing the investment platform. In that case, you need to find brokers that support oil CFDs besides currencies and stock indices.
Conclusion
Crude oil trading is a way to make money from home. However, it involves a significant amount of risk. Therefore, a trader should know how to minimize the risk by diversifying their portfolio. Moreover, the forex broker allows traders to have leverage, which is also a matter of uncertainty. Leverage allows traders to utilize more money than they invest. Therefore, it is an opportunity to stimulate the portfolio with a small investment.
To remain unbeaten in the CFD trading trader should have appropriate money management skills with proper risk and reward per trade.
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