How to Trade Crude Oil CFDs in a Volatile Market
Updated January 10, 2024.
As an asset, crude oil has been one of the most important energy sources in the world for almost a century. In addition to powering vehicles, oil products are also used to heat buildings, produce electricity, and even as a material in creating certain products.
Because of this, oil has consistently held a relatively solid price over the last 50 years. However, since it's both sought-after and rare to find, oil is susceptible to price fluctuations, particularly after major macroeconomic events.
What Is Crude Oil CFD Trading?
To trade with the price change of oil, you'd have to buy/sell it when it hits a low/high price and sell/buy it later for a potential profit/loss. However, unless you have the logistics to manage this (including storage and resources), buying and selling physical oil is a difficult feat. This is where crude oil CFDs come in.
Namely, a CFD, also known as a contract for difference, is a derivative financial product that allows you to trade with the price difference of an asset without having to physically own it. CFDs give you great exposure to the market as they can be used to trade a wide variety of assets, including crude oil price. Moreover, traders can use leverage to magnify their potential profits or loss, even if their starting balance is low.
Of course, CFD trading is not risk-free, as you'd have to risk at least some of your capital to potentially profit from it—and this is magnified in the case of a volatile asset like oil. Still, those who know how to trade CFDs could get potential profit from these price fluctuations.
Important Pre-trading Considerations
Now that we've established why trading crude oil CFDs can be potentially profitable, it's important to take some aspects into consideration before you start trading. Namely, performing detailed research, due diligence, and having a specific strategy go a long way when planning to trade crude oil CFDs. With the right considerations, you may get some potential profit; but there is still risk exposure to the market.
When it comes to oil, there are two main types: Brent Crude Oil and WTI Oil. Brent Crude is extracted from the North Sea and used as a benchmark to price two-thirds of the world's internationally traded crude oil supply. The volatility of crude oil is primarily based on geopolitical events happening in Europe, Asia, and Africa, which is where this type of oil is primarily used. For example, after the start of the war in Ukraine, Brent Oil went up 23%.
On the other hand, WTI or West Texas Intermediate is a type of crude oil that's extracted from Texas and used as a benchmark for pricing in the US. The price of WTI is primarily based on US domestic events such as the opening of the Keystone XL oil pipeline. After the war in Ukraine, WTI went up 19%, which shows that there's a correlation in the price between the two commodities, but also that they're never trading at the same price. This price difference is known as the Brent/WTI spread.
When you're planning to trade oil CFDs, it's important that you have a clear strategy in place. This includes setting entry and exit points as well as stop-loss and take-profit orders. Your trading strategy should also consider the time frame you plan on holding your position as well as the amount of capital you're willing to risk.
Risk Management Strategy
As with any type of trading, oil CFD trading comes with its own risks that need to be managed. This includes the risk of losses as well as the price fluctuations of the commodity. To mitigate these risks, it's important to have a proper risk management strategy in place. This includes setting stop-loss orders at key levels or possibly including a hedging strategy.
Last but not least, in order to trade oil CFDs, you'll need to find a reputable CFD brokerage. This is a platform that will allow you to trade a variety of assets without having to own them, including commodities like crude oil. When looking for a brokerage, it's important to consider the fees associated with trading as well as the features and tools that are available. If you're a beginner, we highly recommend, that you open an account with a reliable brokerage and trade with a user-friendly platform, like Fortrade.
» Struggling to understand complex trading terms? Take a look at our glossary of terms.
How to Start Trading Crude Oil CFDs
Now that we've gone over the important considerations to take into account before trading oil CFDs, let's go over the steps on how to start trading.
- Open an account at a reputable CFD brokerage
- Download and install the brokerage's trading platform
- Deposit the funds you're willing to trade into your account
- Start opening and closing trades via the platform
» Ready to get started? Learn more about opening an account with Fortrade.
Even though crude oil has been a historically volatile commodity, CFD trading may become a potentially profitable endeavor if you take the necessary precautions. This includes performing detailed research, diversifying, and always being up-to-date with geopolitical events. With the right considerations in place, you can trade crude oil CFDs successfully and get potential profit even in the most volatile market conditions.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of the instrument itself