Frequently referred to as the “wild west” of the financial markets, oil futures trading has a reputation for being an incredibly volatile endeavor. Far from securities like the Dow 30 or S&P 500, crude oil is one venue where the risk is almost always on.
Of course, there is risk and then there is RISK. For some, the periodically extreme pricing fluctuations of West Texas Intermediate (WTI) or North Sea Brent (Brent) crude oil suggest pending disaster. To others, the wide daily ranges and consistent price action represent opportunity in its purest form. If you’re hungry for a market that brings lightning-fast breakouts, strong trends, and regular volatility, then oil futures trading may be just your game.
Oil futures trading is a discipline that combines robust pricing volatility with extensive assumed leverage to generate extraordinary profits. However, in order to do this successfully, it helps to understand why oil prices are inherently volatile and how leverage is applied.
Several key market drivers affect global oil values. These factors can send prices tumbling or spiking, depending on how energy traders and investors interpret them. Here are a few categories of these important underpinnings of the oil market:
From release of the weekly Energy Information Administration (EIA) crude oil stocks report to an unexpected act of terror, any of these market drivers is capable of sending oil prices reeling. Due to this fact, the second part of the equation, leverage, is critical. Apply too much and an unfortunate swing in price can quickly drain your trading account, but if you apply too little then a great opportunity is lost forever.
To illustrate this point, let’s examine how leverage works for the WTI crude oil contract available on the Chicago Mercantile Exchange (CME):
Any trades are educational examples only. They do not include commissions and fees.
After looking at the contract specs for WTI crude, you can see that taking a substantial intraday position may be done with as little as $2500. In fact, many oil futures trading strategies do just that in an attempt to secure fast profits. Take the following hypothetical scenario for Hayden the retail energy scalper:
To many traders and investors, the above scenario may seem to be a pipe dream. Price could have just as easily run Hayden’s stops, right? Absolutely. But, given an adequate definition of risk and a positive expectation on the trade setup itself, oil futures trading strategies such as these may be extremely profitable.
If you’re interested in becoming involved in global oil, a consultation with an industry pro at StoneX is a solid first step. However, there’s no substitute for observing the live action of these exciting markets.