How to Start Trading Oil
Jumping into the oil trading market isn’t easy, but individual traders have vast opportunities for success. With the right foundation you can be well on your way to success in the energy market. One of the great aspects of investing in oil is that it is highly liquid. You can buy and sell at virtually any time, from just about anywhere on the planet, in the currency you need. As with any investment opportunity, knowledge is power. There are a few parameters every oil trader should outline before they start trading oil.
1. What kind of market player are you?
This question is probably easy to answer. Most of us are day traders looking to invest in a diversified portfolio. The investments are not part of a political scheme, we aren’t speculators and we don’t use massive quantities of petroleum for our multinational corporation. With that being said, all day traders should know who the other players are and how they affect the oil market and prices overall. In the basic sense, here is the baseline of oil market players:
Day Trader – Relatively small investments in oil rather than keeping it in bonds, stocks, or other financial instruments
Hedge Funds – Long- and short-term profit seekers, large dollar investments often related to speculation and therefore significant risk levels
Industrial Business – Planning for the future by hedging risks (think of a major airline purchasing oil futures so that they can lock in oil costs for the coming years)
Of course, there are also political influences, consumers and producers in the realm of oil, all of which are additional key players in the overall scheme of investing.
2. Understand your motivation and goals
Knowing why you want to start trading oil is just as important as how you invest in the oil market. Are you investing in order to diversify your portfolio? Perhaps you need a potentially long-term investment but want it to be liquid enough if you change your mind. Maybe you want to cash in on market volatility to turn a short profit. Whatever the reason, be sure to define it and then build your strategy around that.
3. Determine your volume and risk level
Once you have figured out what your strategy and goals are for oil investing you need to decide how much you want to invest and how much you’re willing to risk. Any decent investor will tell you that just because the market has always performed a certain way in the past does not mean it will continue to do so. However, historical data mixed with reliable indicators in the current day can help investors choose “safe” trades and can also leave room for speculation with the chance of winning big.
4. Find the right investment
In the energy sector, specifically the oil and natural gas markets, it pays to be an expert. With the oil market being so complex it makes sense to focus your efforts and analysis on a smaller portion. Determining which benchmark to use is a good place to start: Western Texas Intermediate (WTI) or Brent crude. These two benchmarks are often used to indicate global oil prices and have historically been about the same, although some see that changing in today’s market.
5. Bring it all together and start trading oil
As an individual contributor it’s not likely that you will have a significant impact on the market, unless you have the capital to invest hundreds of millions, if not billions, of dollars. It is also generally true that once large market players have hit the market, it’s too late for other players to act and reap the same benefits. It is for this reason that you have to differentiate your strategy and goals to fit realistic expectations when you start trading oil.
Acceptance of risk is a must, but greater risk allows for greater success. It is also important to understand your timeline – are you looking to invest long term? If so, you can rest a little easier knowing that up and down cycles happen over time and bad markets usually bounce back if you’re willing to wait it out. The liquidity of the oil market and its ability to be profitable in a wide range of strategies makes it a valuable investment around the globe.
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