Trading in crude oil can be highly lucrative. But it’s also difficult to navigate trading trends. There’s no question that this market is controlled by the big commercial oil hedge funds, and their goal, not surprisingly, is to insulate oil producers from any serious market swings.
That does not mean it is impossible for smaller players to see success in oil trading, however. Here are some tips for getting started.
Choose the right hours
Theoretically, one can trade in crude oil futures at any time of day. In reality, not all times are equally profitable. Prime trade time is normally from just before 9am EST until 10:30am EST. This is the best time to get in, just be careful to not get caught in a whipsaw effect as the 9am hour turns.
The only exception to this rule is to avoid too much trading on the day the Crude Oil Weekly Inventory report comes out. Most weeks, this will happen on a Wednesday. On some weeks (particularly holiday weeks) it might get pushed to Thursday. The day the inventory report comes out is often, although not always, a poor one for crude oil trading. This is not a fast rule, but it is a helpful guideline to bear in mind.
If you do not consider statistics, you are doing nothing more than simply gambling — you may win some, but you will lose many more. The smart play is to watch the numbers and use them to your advantage.
To do this, watch the equity curve each day. Mark the midpoint of the day’s trading, which often occurs about two hours after trading begins. Watch for the low and high of the five-minute bar and buy when the bar crosses midpoint. Sell if the high of the five-minute bar goes below the midpoint. There’s nothing fancy or tricky about this strategy. It’s just basic, sensible trading that works for a variety of markets.
Understand the OVX
The Cboe Crude Oil ETF Volatility Index, or OVX, was established in 2008 by the Chicago Board of Trade. Its purpose is to measure the volatility of crude oil pricing over a 30-day period. It’s not a perfect predictor, but it can be very helpful.
In general, when the OVX is up, the market has become fearful. Something is or may be about to happen that will adversely affect crude oil prices. Normally, when the OVX is up oil prices are expected to drop. When the OVX is down, the market is optimistic about oil futures. At this point, oil prices tend to rise. As stated, the OVX is not a perfect predictor, nor should it be the only consideration in a crude oil trading strategy. But it is a helpful tool that can give clues about how the market currently feels regarding oil futures.
Watch supply and demand
The crude oil market is more instantly susceptible to supply and demand than other markets. Everything from the weather in the Gulf of Mexico, to the latest outlook for China’s oil demand, to a press release about Iran, can trigger buying and selling as investors try to anticipate how events will affect supply. The same holds true for the seasonal flow of oil futures.
It can be an excellent strategy to keep an eye on these events and track how they affect the market. Get a savvy understanding of how events change trading and eventually it becomes possible to predict changes before the market even has a chance to react. For those who are watchful and quick, this kind of understanding can make all the difference in profitability when it comes to crude oil trading.