Crude Oil Trading Strategies

Crude Oil Trading Strategies: 10 Different Types (Backtests)

Profit from the volatile crude oil market with effective crude oil trading strategies. This article provides concrete methods for timing trades, incorporating market data, and managing risk. Step into the world of crude oil trading with confidence as you learn to navigate its complexities and optimize your trading moves using these strategies.

Crude oil is one of the different assets you can dabble into as a trader, but the market is quite difficult to master because of the many factors that affect it. If you must trade it, you will need to have a backtested crude oil trading strategy.

Crude oil is a naturally occurring, unrefined liquid petroleum that is extracted from the ground and can be refined into various products like gasoline (petrol), kerosene, diesel, lubricants, wax, and other petrochemicals. It is the world economy’s primary energy source, which makes it a very popular commodity to trade. In this post, we take a look at crude oil and how to trade it. We provide a FAQ about crude oil trading, and at the end, we have a backtest of several crude oil trading strategies.

Table of contents:

Key Takeaways

  • Crude oil trading strategies are diverse and require an understanding of market dynamics, including supply and demand, geopolitical events, economic indicators, technological innovations, and seasonal changes.
  • Technical analysis and the use of key technical indicators such as Bollinger Bands, Moving Average Convergence Divergence (MACD), and the Relative Strength Index (RSI) are crucial in guiding trading decisions and capitalizing on market volatility.
  • Decisions by OPEC and geopolitical developments can significantly impact crude oil prices and thus are key considerations in forming crude oil trading strategies. Additionally, ESG considerations are becoming increasingly influential in the global energy sector.
Mastering the Black Gold Crude Oil Trading Strategies

1. Volatility Trading

Trading crude oil within the international market, its pricing is often aligned and subject to shifts prompted by quality differentials and geographic factors. The widespread nature of oil trading means events that may initially appear disconnected—such as geopolitical tensions or climatic changes—can have a profound influence on the price of crude oil, leading to heightened market volatility. Short-term inelasticity in both supply and demand compounds this instability, indicating substantial price adjustments might be necessary to restore equilibrium following disruptive occurrences.

Navigating such fluctuations may seem daunting. Employing effective techniques can turn this unpredictability into a strategic asset. Technical analysis plays an essential role when dealing with these variations by utilizing historical data trends through patterns, indicators, and oscillators designed for predicting future directional movements in prices. Prominent technical indicators utilized in navigating the ebb and flow of the crude oil arena include Bollinger Bands—which track price volatility. Moving Average Convergence Divergence (MACD)—which detects changes in momentum. And Relative Strength Index (RSI)—to discern conditions where assets are considered overbought or oversold. These instruments serve traders by providing insights into current market dynamics so they can exploit potential opportunities presented by the shifting landscape of global crude oil prices.

Identifying breakout levels in crude oil trading

2. Breakout Trading

Another prevalent strategy in crude oil trading is breakout trading. It involves identifying and trading breakouts in crude oil prices, using key price thresholds to determine entry and exit points. These breakouts can lead to significant price movements in specific energy sectors tied to oil production and exploration. However, it’s crucial to remember that a genuine breakout in crude oil prices requires the daily candle to avoid touching the breakout price level for the duration of the confirmation period.

When trading crude oil breakouts, underlying price support and resistance levels play a crucial role. Here are some key points to consider.

  • More touches on these levels indicate greater validity and importance.
  • The longer these levels have been in play, the more significant the price movement is likely to be when a breakout finally occurs.
  • A larger recent trading range can increase the odds of entering a trade with enough room for price movement following a breakout.

And remember, breakouts in crude oil prices are often accompanied by heavy volume and increased volatility, indicating a more significant market move.

Spread trading between Brent and WTI crude oil contracts

3. Spread Trading

Moving on, we delve into spread trading. This widely used strategy capitalizes on the price difference between two related commodities, like Brent and WTI crude oil. Brent crude oil, sourced from the North Sea, is a major pricing benchmark for Atlantic basin oil, while WTI crude oil, from Texas, serves as the benchmark for oil from the Americas. However, although Brent and WTI prices typically track each other closely, divergences can occur due to supply/demand imbalances, geopolitical events, and other factors.

Traders can profit from the Brent-WTI spread by taking positions in the futures contracts of both types of crude oil—going long (buying) on one and short (selling) on the other, based on their respective price movements. To capitalize on these opportunities, one can trade crude oil futures effectively.

A simple trading strategy involves:

  1. Using a 20-day moving average of the WTI/Brent spread
  2. Entering a short position if the current spread is above the moving average
  3. Entering a long position if the current spread is below the moving average
  4. Betting on a reversion to the mean.

This strategy allows traders to take advantage of the price differences between Brent and WTI crude oil.

4. Mean Reversion

Mean reversion, a financial theory, suggests that prices – including those of crude oil – tend to revert to their average levels following drastic price movements. In the context of crude oil trading, mean reversion strategies can be based on technical indicators like:

  • simple moving averages (SMAs)
  • Bollinger Bands
  • regression channels
  • Keltner channels
  • Envelopes

These indicators can help identify when the price may revert back to its mean.

A mean reversion strategy might involve buying crude oil when its price falls below a moving average and selling when the price rises above it, with traders expecting the price to revert to the moving average over time. However, it’s important to note that a price moving away from its mean does not necessarily imply it will revert immediately; the mean itself could also move to meet the current price.

Calendar spread trading in crude oil futures

5. Calendar Spread Trading

Delving deeper into spread trading strategies, we turn our attention to the approach known as calendar spread trading. This method capitalizes on disparities in pricing between different crude oil futures contracts that are set to expire at distinct times. When undertaking a calendar spread, a trader Purchases a long-dated crude oil futures contract while simultaneously taking a short position in another with an earlier expiration date but identical strike price.

For this type of trade—a calendar spread—to be successful and generate profits, it is most advantageous when the underlying commodity—crude oil—is stable in price without exhibiting significant upward or downward movement before the expiration of the shorter-term option involved. Essentially, engaging in this kind of transaction allows traders to potentially benefit from both time decay and any potential surge in implied volatility within an investment strategy that remains neutral with respect to market directionality.

Crack spread trading in the oil market

6. Crack Spread Trading

Another strategy that can be used in the crude oil market is crack spread trading. This involves trading the price difference between crude oil and its refined products, such as gasoline and heating oil. Rising crude oil prices due to breakouts can introduce broader market volatility and inflation concerns, potentially affecting investor positions and market dynamics. Additionally, crude oil ETFs can be considered as an alternative investment option in the oil market.

Traders can successfully execute a crack spread trade by locking in favorable refining margins or protecting against adverse price movements in the markets. However, it’s important to bear in mind that the success of a crack spread trade largely depends on the trader’s understanding of the economic fundamentals of the market, including seasonal and historical price patterns.

7. Statistical Arbitrage

Statistical arbitrage, a quantitative method, is used to identify and exploit pricing inefficiencies in the crude oil market. Traders can use statistical arbitrage to profit from temporary price deviations between highly correlated assets. A popular approach in statistical arbitrage uses a rolling window model, such as the 12+6 mode, where the formation period is 12 months, and the trading period is 6 months.

The trading strategy’s performance can be evaluated by backtesting, which involves historical data to assess the strategy’s validity and profitability over time. Backtesting allows traders to simulate their trading strategy on past market data to see how it would have performed.

8. Physical Arbitrage

Physical arbitrage in crude oil trading involves securing risk-free profit by relocating product from one area to another, exploiting price discrepancies. Traders engaging in physical arbitrage may buy a petroleum product in one market where it is undervalued and sell it in another market where it is overvalued, profiting from the differential.

Physical arbitrage trading may also involve the use of futures contracts to hedge against price movements in the physical product, allowing the trader to focus on price differences between regions rather than overall market trends. In this way, physical arbitrage offers an opportunity for traders to profit from the geographic price differences that can arise in the global oil market.

9. Intra-Commodity Spreading

Intra-commodity spreading involves engaging in simultaneous buying and selling of futures contracts for the identical commodity, yet with varying maturity dates. The primary aim is to profit from the disparity in prices between these two futures contracts within the same market.

Participants in this strategy attempt to position themselves relative to the price differential across contracts or establish a protective hedge against fluctuations in prices of the base commodity. Since intra-commodity spread trades usually require less margin compared to an outright single futures contract position, traders are exposed less intensively to complete price shifts associated with either individual contract.

10. Intermarket Analysis

Intermarket analysis examines the interconnections between different financial sectors, such as equities, bonds, commodities, exchange traded funds (ETFs), and foreign currencies, to uncover economic patterns and inform trading choices. The relationship between crude oil prices and other market segments is particularly telling. It can yield important clues for traders. For example, an ascending value of the U.S. dollar usually signals a downturn in commodity prices including that of crude oil since these tend to be priced in dollars.

In contrast, when the U.S. dollar weakens, it is often seen as favorable for commodity prices, which could lead to higher costs for crude oil when exchanged with alternate currencies. Utilizing intermarket analysis allows traders to anticipate potential cascading effects within various markets resulting in more astute investment strategies.

What are Crude Oil Trading Strategies?

Crude oil trading strategies entail the purchase and sale of contracts for crude oil to capitalize on its volatility and market trends. These strategies often vary depending on the trader’s risk tolerance, trading goals, and understanding of the market. For instance, professional traders and commercial players like big oil producers and hedge funds dominate the crude oil market, making it necessary for individuals to have solid strategies to compete effectively.

An effective crude oil trading strategy involves understanding the market’s liquidity, the relationship between crude oil and the US Dollar, and using this knowledge to make informed trading decisions. Some common crude oil trading strategies include swing trading, where traders look to profit from market volatility within a short to medium timeframe. Other strategies involve using technical indicators like the stochastic RSI and CCI to identify overbought and oversold conditions in the crude oil market.

What factors influence Crude Oil trading strategies?

Crude Oil Trading Influences

A range of factors, from economic growth to geopolitical events, influence crude oil trading strategies. Some key factors include:

  • Economic growth and industrial production levels, which influence demand for crude oil as higher economic activity typically increases oil consumption.
  • Geopolitical events, such as conflicts and political instability in oil-producing countries, which can impact global oil supply and affect trading strategies.
  • Decisions by oil-producing alliances like OPEC+, which can also significantly impact global oil supply and trading strategies.

These factors should be carefully considered when developing crude oil trading strategies.

Technological innovations in oil extraction, such as hydraulic fracturing (fracking), have altered supply dynamics by increasing available oil reserves, changing the landscape of crude oil trading. Seasonal changes and population growth can affect oil demand patterns, with more oil typically used during busy travel seasons and colder months for heating. Derivatives markets and the trading of oil futures and options contracts play a role in crude oil trading strategies, as they are used for hedging against price volatility and for speculative purposes.

What are common risks in Crude Oil trading?

Similar to any other financial market, trading crude oil involves risk. Market risk in crude oil trading refers to the possibility that changes in market dynamics, particularly price fluctuations, will alter the financial position of an oil company or trader. Basis risk involves the risk that the price differential between the same commodity in different markets, such as variations in delivery location or time, will impact the financial position of the company or trader involved.

Credit risk is another major consideration. This refers to the concern that a counterparty will not honor the contract terms, either by failing to deliver the agreed-upon commodity or to pay the agreed-upon price.

Operational risk pertains to potential losses stemming from errors or insufficiencies in the systems or processes necessary to:

  • Structure
  • Price
  • Trade
  • Manage positions within an organization.

How do technical indicators inform Crude Oil trading strategies?

Technical indicators significantly inform crude oil trading strategies. Some essential indicators for trading crude oil include:

  • Fundamental data: Provides a strategic macro view which helps in understanding the economic factors influencing oil prices.
  • Momentum indicators: Help identify the strength and direction of price movements.
  • Support and resistance levels: Indicate price levels where buying or selling pressure is expected to be strong.

These indicators are crucial for developing effective trading strategies in the crude oil market.

Momentum indicators, such as the Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), and Stochastics, are used to measure the speed and change of price movements, offering versatility across different time frames. Support and resistance levels represent predetermined price points where the price action of crude oil tends to face obstruction, serving as critical guideposts that mark potential turning points.

How does market sentiment impact Crude Oil prices?

Market sentiment, reflecting the collective trading decisions of all market participants, substantially influences crude oil prices. Here are some key points to consider.

  • A study has shown that online investor sentiment has a significant impact on crude oil prices, contributing to 49.84% of the fluctuations of WTI oil prices.
  • The correlation between oil price changes and external events can be intensified by investor sentiment, particularly during crises like the COVID-19 pandemic.
  • Crises affect market traders’ expectations and exaggerate the impact of nonfundamental information shocks.

The impact of investor sentiment on crude oil prices may vary depending on market conditions, with different effects observed during crises, bull markets, or bear markets. In times of crisis or uncertainty, traders often look to safe-haven assets, leading to increased selling pressure in riskier assets like crude oil. This trend can weigh down on crude oil prices, making understanding and tracking market sentiment a crucial aspect of crude oil trading.

What are the best times to trade Crude Oil?

Optimal times for trading crude oil often align with periods of high market activity and the release of significant economic news or reports. The overlap of the European and North American sessions (around 8:00 AM to 12:00 PM EST) is often considered the best time to trade crude oil due to the combined trading activities of these two major markets. The North American trading hours often see the highest trading volumes and significant price movements, especially when the New York Mercantile Exchange (NYMEX) is active.

However, there is no singular “best” time to trade oil as profitability can be achieved from both rising and falling markets when trading with derivatives such as futures and CFDs. This allows traders to potentially profit from crude oil price movements regardless of the direction. Thus, the best time to trade crude oil may depend on the individual’s trading strategy, market conditions, and the specific crude oil contract being traded.

How do traders manage risk in Crude Oil trading?

Risk management is an essential component of any successful trading strategy, including those utilized in crude oil trading. Traders manage risk in crude oil trading by understanding market dynamics such as supply and demand, geopolitical events, and economic indicators that affect oil prices. Having a well-defined trading plan is essential for risk management, outlining trading goals, entry and exit strategies, position sizing, and risk tolerance.

Stop-loss orders are employed to limit potential losses by setting predetermined levels at which a trade will automatically close. Diversification across different assets and markets, including various contract months and crude oil benchmarks, helps mitigate individual market risks. Monitoring margin requirements regularly ensures traders have sufficient funds to cover potential losses and avoid forced liquidation of positions.

Furthermore, disciplined money management and risk control strategies, such as setting a reasonable portion of capital for each trade and establishing maximum risk limits per trade or day, are vital.

How do economic data releases influence Crude Oil markets?

Economic data releases can substantially impact crude oil markets. For instance, the response of OPEC to market developments, such as increasing production to moderate high oil prices, can influence trading strategies, as traders may anticipate these actions and their likely impact on supply and price levels. Economic data can influence crude oil markets through its impact on energy derivatives trading, such as futures and options, which are used by participants to hedge risks or seek profits.

The open interest on exchange-traded crude oil futures contracts has increased significantly, indicating a rise in market activity and potential price influence from a growing number of market participants. Therefore, understanding how economic data releases influence crude oil markets can provide valuable insights for traders, allowing them to anticipate potential market movements and adjust their trading strategies accordingly.

Can automated trading systems be used in Crude Oil trading strategies?

In the world of crude oil trading, automated trading systems can be an invaluable asset. These systems are computer programs that use algorithms and analytics to conduct oil trading on behalf of a trader based on predefined parameters. They can analyze market data and make trading decisions in real-time, allowing them to capitalize on market fluctuations quickly.

Automated trading systems offer several benefits, including the ability to execute trades at speeds far surpassing human capabilities, allowing crude oil traders to capitalize on small price movements efficiently. They also enable 24/7 trading, providing the ability to react to global trading opportunities and market events in real-time, which is particularly useful in the crude oil market that is influenced by international factors.

What are the key differences between Brent and WTI Crude Oil?

Brent and WTI, two major benchmarks for global oil prices, are often the focal point of crude oil trading. Brent crude oil is produced in the North Sea region of the Atlantic Ocean, whereas WTI crude oil is extracted mainly from the Permian Basin in the United States. The Brent oil fields are situated in the European areas between Norway and the Shetlands, while WTI crude is shipped to the Midwest and the Gulf of Mexico for refining.

Despite their similarities, Brent and WTI crude oils differ in several key aspects. Brent crude oil has an API gravity of 39.8 percent and a sulfur composition of 0.37 percent, making it light and sweet, and relatively easy to refine. WTI crude oil also has a light sweet crude oil quality, with an API gravity of 39.6 percent and sulfur content ranging between 0.24 and 0.34 percent.

What are some key tips for beginners in Crude Oil trading?

If you’re venturing into crude oil trading, it’s essential to begin with a solid grasp of the market and develop a trading strategy consistent with your financial goals and risk tolerance. Beginner traders should analyze demand and supply factors and adopt a ‘buy and hold’ strategy, taking calculated positions and closing before expiry if predictions are accurate.

Utilizing technical analysis and indicators such as candlesticks, bar charts, and trading volume can help predict future price movements and inform decisions on the best times to buy and sell crude oil.

Swing trading strategy involves holding a commodity for a short period, ranging from minutes to a few days, and relies on short-term supply and demand changes and technical analysis for profit.

What are the implications of OPEC decisions for Crude Oil trading strategies?

Decisions by the Organization of Petroleum Exporting Countries (OPEC) can dramatically affect crude oil supply and prices, thus shaping trading strategies and market dynamics. OPEC decisions can lead to shifts in market sentiment, influencing traders to adjust their positions in anticipation of price changes. OPEC’s commitment to market stability and maintaining prices at acceptable levels can encourage traders to focus on long-term strategies rather than short-term speculation.

For instance, decisions by OPEC+ to cut production, such as those agreed for the first quarter of 2024, can create expectations of tighter supply, potentially leading to higher oil prices and influencing trading strategies towards bullish positions. The extension of voluntary output cuts by major producers like Saudi Arabia and Russia can signal market support and might encourage traders to adopt strategies that capitalize on anticipated price stability or increases.

How do energy sector correlations affect Crude Oil trading strategies?

Grasping the correlations between crude oil and other energy assets can aid traders in identifying potential opportunities and risks. For instance, understanding the correlations between crude oil and renewable energy stocks is crucial for investors’ risk management and portfolio diversification. The relationship between crude oil prices and renewable energy companies is time-varying. In the long-term, the links between crude oil and clean energy stocks tend to be stronger than in the short-term, but weaker than in the medium-term.

The dependence of clean energy companies’ stocks on crude oil has been found to decrease in recent years, suggesting a shift in the energy sector that could affect crude oil trading strategies. Market links between crude oil prices and renewable energy stocks are observed to strengthen during financial turmoil, indicating that crude oil trading strategies should account for broader market conditions.

Which indicator is best for crude oil trading?

In crude oil trading, the selection of the best indicator hinges on your trading style, market conditions, and personal preference. However, some indicators have proven to be particularly useful for crude oil trading. Fundamental data, momentum indicators, and support and resistance levels are considered essential for trading crude oil.

Fundamental data provides a strategic macro view which helps in understanding the economic factors influencing oil prices. Momentum indicators, such as the Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), and Stochastics, are used to measure the speed and change of price movements, offering versatility across different time frames. Support and resistance levels represent predetermined price points where the price action of crude oil tends to face obstruction, serving as critical guideposts that mark potential turning points.

What is the best session to trade crude oil?

The best session for trading crude oil is determined by several factors, including market volatility, news events, and individual trading strategies. The overlap of the European and North American sessions (around 8:00 AM to 12:00 PM EST) is often considered the best time to trade crude oil due to the combined trading activities of these two major markets. The North American trading hours often see the highest trading volumes and significant price movements, especially when the New York Mercantile Exchange (NYMEX) is active.

However, there is no singular “best” time to trade oil as profitability can be achieved from both rising and falling markets when trading with derivatives such as futures and CFDs. This allows traders to potentially profit from crude oil price movements regardless of the direction. Thus, the best time to trade crude oil may depend on the individual’s trading strategy, market conditions, and the specific crude oil contract being traded.

What are the implications of ESG considerations on Crude Oil trading?

Environmental, social, and governance (ESG) factors are progressively molding the landscape of the global energy sector, carrying significant implications for crude oil trading. Environmental concerns like carbon emissions and renewable energy adoption can negatively impact oil returns, which may favor investments in ESG-related assets instead of traditional oil stocks. Social issues around human rights violations in oil-producing regions can disrupt oil supply and increase demand for cleaner resources, thereby boosting ESG investments.

The performance of oil companies on ESG criteria can affect their ESG scores and ratings, potentially leading to their exclusion from ESG indices and affecting investor sentiment towards these companies. High uncertainty can lead firms to engage in more ESG activities to create trust among stakeholders, reduce risk-taking, and decrease the cost of capital, which may act as an insurance during market turbulence and affect the oil market.

What is the best strategy for crude oil options trading?

The best strategy for crude oil options trading involves utilizing exit signals based on indicators or intraday trends, employing the long straddle strategy to profit from increased volatility, and considering a “buy and hold” approach while analyzing demand and supply factors. It is essential to make calculated positions and close the position to book profits before expiry.

What is the best session to trade crude oil?

Trading crude oil is most advantageous during the period when the European and North American sessions converge, typically from 8:00 AM to 12:00 PM EST. During this interval, corresponding with the London and New York session overlap, trading volumes surge and price movements become more pronounced.

Which indicator is best for crude oil trading?

The MACD, RSI, and Bollinger Bands serve as powerful tools in the realm of crude oil trading by shedding light on market momentum, highlighting when conditions are overbought or oversold, and pinpointing possible moments to initiate trades.

Tracking crude inventory levels is a vital component for anyone engaged in oil trading because it delivers critical data concerning trends in both the production and consumption of oil.

How to make money in crude oil trading?

In the realm of crude oil trading, exploiting the fluctuations in oil prices can lead to profit through derivative tactics. Strategies involve engaging in activities such as purchasing and selling options or establishing positions within futures contracts tied to crude oil derivatives.

By employing these methods, one can leverage market trends and churn out financial gains from movements within the sector of oil trading.

What are some common crude oil trading strategies?

Numerous trading strategies for crude oil, including volatility trading, breakout trading, spread trading and mean reversion are available. Selecting the appropriate strategy hinges on your market understanding, appetite for risk, and investment goals when engaging in crude oil trading.

What is crude oil?

Crude oil is a naturally occurring, unrefined liquid petroleum that is extracted from the ground. It was first discovered and developed during the Industrial Revolution, and it is still powering the world’s economy today. Present underneath the earth’s crust, it is typically obtained through drilling, alongside other resources, such as natural gas.

Crude oil has a range of viscosity and can vary in color from black to yellow depending on its hydrocarbon composition. It can be refined into various products like gasoline (petrol), diesel, kerosene, asphalt, lubricants, wax, and other petrochemicals. These products are used to fuel our automobiles, aircraft, and various industries, including cosmetics, fabrics, and pharmaceuticals.

As the world economy’s primary energy source, crude oil is one of the most actively traded commodities in the world. Crude oil is a nonrenewable resource; it can’t be replaced naturally at the rate we consume it. So, it is available in a limited supply, which is why the demand is high, creating massive price fluctuations that traders try to profit from.

Dubbed the “black gold”, crude oil is a popular commodity, and its demand often sparks political unrest because a small number of countries, especially in the Middle East, control the largest reservoirs. Saudi Arabia, Russia, and the US are the leading producers of oil in the world. The supply/demand dynamics and the resultant massive price fluctuations make crude oil trading popular among commodity traders.

What are the primary types of oil on the market?

There are many different types of crude oil traded on the global market, but only two primary types serve as global benchmarks for crude oil prices. They are:

  1. Brent Crude Oil: This is obtained from oil fields in the North Sea. It is characterized as a “light and sweet” oil, although it is not as “sweet” or “light” as WTI. Brent Crude Oil constitutes about two-thirds of global crude oil contract trades.
  2. WTI Crude Oil: West Texas Intermediate (WTI), as the name suggests, is gotten from US oil fields primarily in Texas, Louisiana, and North Dakota. It is referred to as ‘light sweet crude oil’ due to its low density and low sulfur content, which make it less expensive to produce and easier to refine than ‘heavy’ or ‘sour’ oils. It is the main benchmark for oil consumed in the US.

Is crude oil good for trading?

Yes, crude oil can be really good for trading. As with other commodities, crude oil contracts are traded for speculative or hedging purposes — to profit from the fluctuation in oil prices.

But for a retail trader with limited analysis capabilities, is crude oil good for trading?

Well, we don’t think so. We believe crude oil is difficult to trade because it’s influenced by a lot of macro news that is nearly impossible to track or forecast.

Besides, there is no tailwind like in stocks, which can go up in the long run (please read night trading stocks to understand why). Crude oil prices have no general direction. It’s at the mercy of geopolitical risk (more or less all the time). It’s a strategic “weapon” that is used to gain geopolitical leverage.

Our experience indicates crude oil is very tough to trade. It’s hard to find any profitable strategies, and those which pass our incubation period are much less likely to last for a long time, unlike stock trading strategies, for example.

The best strategies can be found in our….

Strategy Shop

Backtested trading strategies

Price changes are often associated with world politics. A cough by the Saudi Arabian crowned prince could send crude prices soaring or plummeting, let alone a phone call between Saudi and Russia. The same can be said of OPEC meetings, US sanctions on some countries like Iran and Venezuela, trade wars, and Middle Eastern geopolitical crises.

There are just too many variables at play that can move the prices of crude oil, which you may not be able to track as an individual trader. The demand and supply dynamics are too politically motivated to be predictable. So, given the unpredictable volatility and factors affecting the market, crude oil trading can be very risky for a retail trader with limited resources.

However, for diversification purposes, any crude oil trading strategy is very valuable – if you find something that is consistent. But compared to stocks, we rarely find something that lasts over many years.

Where can you trade crude oil?

You can trade crude oil in many different ways, including futures, options, stocks, ETFs, and CFDs.

  • Futures: Crude oil futures are contracts to exchange an amount of oil at a set price on a set date. Oil futures are a common method of buying and selling oil, and they enable you to trade rising and falling prices. You can trade futures contracts of any of the two types of crude oil (Brent or WTI) on a commodity futures exchange, such as the Intercontinental Exchange (ICE), New York Mercantile Exchange (NYMEX), and the CME Group’s Globex platform. You can access the exchange by opening an account via a futures broker.
  • Options: Crude oil options contracts give you the right to buy or sell an amount of oil at a set price (strike price) on or before a specified expiry date (expiry trading), but you wouldn’t be obliged to exercise your option. Options contracts are also traded on futures exchanges, and you would need to open an account with a broker to have access to the market. There are two types of options contracts: call options and put options. You buy a call if you think the prices would rise and buy put if you think prices would fall. (Please read our take on SPY covered call and trading spy options.)
  • Stocks: You can gain exposure to the crude oil market by trading stocks of companies that are involved in crude oil exploration, refining, and marketing. Stocks are traded on stock exchanges; to trade them, you have to open an account with a stockbroker, for example, Interactive Brokers.
  • ETFs: Another way to gain exposure to the crude oil market is to trade ETFs, which are a collection of crude oil stocks. Some crude oil ETFs invest in crude oil futures or track the futures prices. You can buy and sell crude oil ETFs in the same way you do stocks in the stock market. When the price of oil fluctuates, it affects the share prices of crude oil stocks and, subsequently, the value of the ETF.
  • CFDs: Crude oil CFDs (contracts for difference) are contracts with an online broker to exchange the difference in the price of crude oil contracts between the time you open a trade and the time you close it. To trade crude oil CFDs, you have to open an account with a CFD broker. This is the easiest way to trade crude oil, as you do not have to worry about asset delivery associated with futures trading.

What is the best strategy for trading crude oil?

The best way to trade crude oil, we believe, is by trading it based on seasonality. Seasonality refers to significant patterns in the price movement of an asset during certain times of the season. Since crude oil is refined into gasoline and distillate, the seasonal trends in crude inventories are in line with the demand for gas and distillate. Seasonal peaks usually appear in April, May, and November, while troughs appear in January and September.

(As a matter of fact, most of the gains have come from the end of November to the end of April – please read our seasonal trading strategy in crude oil.)

In addition, analyzing macroeconomic events that happen around the world and how they might affect the crude oil market is the only way to stand a chance of making profits from crude oil trading.

The only holy grail trading strategy is that you must have many trading strategies spread over as many asset classes as you find profitable.

Which trading indicator is best for crude oil trading?

We believe seasonality indicators are the best indicators for crude oil trading. Traditional oscillating or mean reversion indicators don’t work well in the crude oil market. As a matter of fact, in the few crude oil trading strategies we trade ourselves, we don’t use any indicator at all. Instead, we rely on the time of the day and the time of the week (plus one or two other parameters).

What is the best time to trade crude oil?

The best time to trade crude oil is late in the week. Apart from that, there are some seasonal trading edges that have been reasonably consistent for a number of years.

Can you scalp crude oil?

Yes, you can scalp crude oil. Although you are most likely to end up penniless. You can read here why scalping is not profitable.

Crude oil trading strategy 1 (backtest)

Let’s backtest a crude oil trading strategy with trading rules and settings (WTI). We’ll start with one strategy we published as far back as 2013, called Friday seasonality in USO (oil).

The crude oil trading strategy is the buying and selling of different types of crude oil contracts to make a profit from the fluctuation of oil prices.

The trading rules are these:

Trading Rules

THIS SECTION IS FOR MEMBERS ONLY. _________________ Click Here To Get Access Click Here To Get Access To Trading Rules

This time we don’t backtest USO (an ETF that tracks crude oil) but rather the futures contract (@CL).

The historical performance has been decent and the trading performance metrics are good:

Crude oil trading strategy backtest
Crude oil trading strategy backtest (long)

(The backtest is not a futures backtest with margin and points. Instead, we used an “equity backtest” with no leverage, although the @CL contract is used.)

There are 341 trades with an average gain per trade of 0.25%, more than enough to make a decent profit. The win rate is 58% and the average winner is bigger than the average loser. Max drawdown might be a problem, though. Profit factor is a bit low at 1.65.

Crude oil trading day trading strategy 2 (Backtest)

We have one day trading crude oil strategy, but that one we prefer to keep ourselves. It’s one of the few day trading strategies for crude oil that has held up well for many years.

Below are a couple of equity curves of strategies that we found a couple of years back when we researched the article called which day of the week is stocks most volatile.

We have the two strategies in incubation (or under surveillance, so to speak). The first strategy buys in the morning and closes the position in the evening depending on one single variable:

Crude oil day trading strategy backtest (long)
Crude oil day trading strategy (long)

It trades very frequently: 411 trades, the average gain is 0.19%, and the probability of having a winner is 60%. But it has suffered from long periods of drawdowns or flat performance. It’s a long strategy.

The other is a short strategy, and as expected for a short strategy, it’s pretty inconsistent and probably not tradable:

Crude oil day trading strategy backtest (short)
Crude oil day trading strategy (short)

What is the seasonality of Crude Oil?

The seasonality of Crude Oil futures refers to the tendency of an asset’s price to move in a fairly predictable way during certain periods of the year. The periods here may refer to the months of the year or the four seasons (winter, spring, summer, and fall) of the year.

Crude oil futures have been noted to perform better during the spring and summer months than during the fall and winter. See the chart below:

Crude oil futures strategy
Source: Equity Clock

Are there any crude oil price ETFs?

Yes, there are many crude oil price ETFs. These are a few of them:

  • iPath Pure Beta Crude Oil ETN (OIL)
  • ProShares UltraShort Bloomberg Crude Oil (SCO)
  • ProShares K-1 Free Crude Oil Strategy ETF (OILK)
  • United States 12 Month Oil Fund LP (USL).

Is crude oil trading profitable?

Yes, crude oil trading is profitable with a good backtested crude oil trading strategy that is tested over many different business cycles and over many years.

What is crude oil trading strategy?

Crude oil trading strategy is a multifaceted approach that involves the systematic buying and selling of crude oil contracts with the primary goal of capitalizing on the price fluctuations in the crude oil market. The strategy is essential for traders looking to navigate the complexities of the volatile energy market and maximize their potential for profitability. Traders can choose from various instruments such as futures contracts, options, ETFs, and CFDs to gain exposure to the crude oil market. Each instrument has its own risk and reward characteristics, and the choice depends on the trader’s preferences and risk tolerance.

How is crude oil extracted and what products can it be refined into?

Brent Crude Oil, obtained from the North Sea, is characterized as “light and sweet,” constituting two-thirds of global crude oil trades. WTI Crude Oil, from US fields, is known as ‘light sweet crude oil’ and serves as the main benchmark for US oil consumption. Crude oil is extracted from the ground and can be refined into products such as gasoline (petrol), diesel, kerosene, lubricants, wax, and other petrochemicals. The extraction process typically involves drilling.

Why is crude oil considered a challenging asset for trading?

Crude oil trading is challenging due to its susceptibility to macro news, geopolitical influences, and unpredictable price fluctuations. Factors like OPEC meetings, geopolitical crises, and global politics play a significant role in its volatility. Crude oil trading carries inherent risks due to geopolitical influences and market unpredictability. While profitable strategies exist, it’s crucial to manage risk effectively. The majority of traders may experience losses, and the market is often used for hedging.

Conclusion

As we have mentioned in the article, crude oil is a pretty difficult asset to trade (compared to stocks – our favorite asset). If you are not successful at trading stocks, we believe it’s even more unlikely you’ll succeed with any crude oil trading strategy.

But any crude oil strategy is likely a great addition to a portfolio of trading strategies (because it’s likely slightly uncorrelated to the performance of the stock market).

To sum up, any crude oil trading strategy is likely to be both less robust than any stock/equity strategy and less likely to pass the incubation periods.

In this comprehensive guide, we’ve delved deep into the world of crude oil trading, exploring various strategies ranging from volatility trading and breakout trading to spread trading and mean reversion. We’ve also discussed the key factors that influence crude oil trading strategies, the common risks involved, and how technical indicators can inform these strategies. Additionally, we’ve shed light on the implications of various factors such as OPEC decisions, ESG considerations, and energy sector correlations on crude oil trading. As we’ve seen, successful crude oil trading requires a solid understanding of the market, a well-defined trading strategy, and effective risk management techniques. Here’s to your success in navigating this exciting world of opportunities!

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