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How to Trade Oil Online in 2020

It’s not difficult to get started as an oil trader. What’s more challenging is achieving consistent success trading oil online. Review this page, as well as other related articles on our website, to help you learn the tricks of the trade when it comes to oil trading online.

If you’re ready to start trading oil online, check out the tables below. Otherwise, keep reading.

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Ready to trade oil? We’ve reviewed some of the best online oil brokers below. Take a look.

How to trade oil online – an easy five-step guide

Before you get started as an online oil trader, get to know the various methods you can use to trade oil online so you can choose the method that works best for you. 

  1. Know your trading strategy. The method you use to trade oil online should match your level of expertise. If you’re just starting out, keep it simple. 
  2. Decide your budget. If you have £500 available for trading, you’ll likely approach oil trading in a different way than if you have £50,000 in your account. Figure out your budget before you make your first trade.
  3. Select your broker and sign up. Pick a broker with reasonable transaction fees, a strong reputation, and an easy-to-use trading platform. Once you’ve found the best online commodity broker for your needs, sign up and you’ll be ready to start oil trading online.
  4. Assess and manage risk. A stop-loss order is a trading strategy that allows you to limit the size of your loss by setting a sell order that will automatically trigger once your oil trade falls to a certain price. Figure out how far below your buy price you want your stop-loss order to be. Then, when you make your first trade, immediately place your stop-loss order to protect your capital.
  5. Place your first trade. You’ve done all your due diligence, figured out your pressure points and devised a trading strategy. Make your first trade and begin your oil trading journey.

Types of oil-related assets to trade

There are many different methods you can use to trade oil. Here’s a rundown:

Contracts for difference

A contract for difference (CFD) is an agreement between two parties, a buyer and a seller. The buyer must pay the seller the difference between the current value of an asset and the asset’s value at contract time. 

  • Pros of CFD trading: You can take both long and short positions, betting on the value of oil to go up or down. CFD brokers don’t usually charge transaction costs, instead making their money from the spread, which is the difference between the bid price and the ask price. CFD trading lets you trade oil with leverage, giving you the ability to make larger trades with a smaller amount of capital.
  • Cons of CFD trading: Just as trading oil with leverage gives you a chance to make more money if the price of your oil contract goes up, it can also increase the size of your loss if the price of your oil contract goes down. If the price of the contract drops below a certain point and you don’t have enough money in your account to support the position, you could end up with nothing. If you leave a CFD position open overnight, you’ll be charged additional fees.

Oil futures 

An oil futures contract is an agreement to buy or sell oil at a set time in the future, at a specified price. 

  • Pros of oil futures: You can use oil futures contract to hedge against price fluctuation. The pricing model for futures contracts is simpler than it is for some other trading methods.
  • Cons of oil futures: Unexpected future events can cause big price fluctuations that might hurt your trade. (Although price volatility can sometimes work to your advantage, as we’ll discuss shortly.) Futures contracts have an expiration date, so the contracted price for the oil contract can become less attractive as the closing date gets closer. 

Oil options

Oil options let you buy or sell oil on a future date at a set price. Oil options differ from oil futures because there is no ironclad contract involved, which means you have the option not to buy or sell if you wish.

  • Pros of oil options: Trading with leverage gives you a chance to make bigger gains using smaller amounts of capital. You can either go long or short on your options trades, meaning you’re betting on the price of oil to either go up or down.
  • Cons of oil options: Options contain a time value that’s constantly diminishing, so you need to be right within a certain amount of time. Transaction fees tend to be higher when trading options than they are with other forms of oil trading.

Oil ETFs

An ETF (Exchange Traded Fund) is a type of investment that contains multiple assets (in this case oil stocks) and is traded on exchanges, in much the same way as stocks are traded.

  • Pros of oil ETFs: By investing in many different oil stocks at once, you’re diversifying your risk. Low management fees keep cost down.
  • Cons of oil ETFs: If the price of a particular oil stock skyrockets, you’ll make more money by owning that stock than you would with an ETF full of different oil stocks. 

Oil stocks

Rather than owning many different oil stocks in an ETF, you can simply choose to buy shares in a publicly traded oil exploration, production, or services company.

  • Pros of oil stocks: Because oil prices have become more volatile in recent years, you can bag big, quick gains if you become an expert swing trader. Because oil is a valued commodity all over the world, owning oil stocks gives you a chance to profit in just about all market conditions.
  • Cons of oil stocks: If you happen to guess wrong on the oil stock you buy, you’ll likely end up with steeper losses than if you’d simply bought an oil ETF.

Know what affects oil prices

There are many factors that can affect the price of oil. Here are some of them:

Crude oil trading offers excellent opportunities to profit in nearly all market conditions due to its unique standing within the world’s economic and political systems. Also, energy sector volatility has risen sharply in recent years, ensuring strong trends that can produce consistent returns for short-term swing trades and long-term timing strategies.

  • Supply and demand. Geopolitical disputes can hurt oil supply, while new oil discoveries can boost oil supply. On the demand side, oil can be used as a safe haven investment during market downturns and a hedge against inflation, so when one of those events happens, oil prices often go up. The balance of supply and demand is the most common cause of a commodity’s price movement. 
  • Market sentiment. Whatever the fundamentals of the market might be, investor optimism and pessimism can sometimes play an even bigger part  in determining the price of a commodity (in this case oil). 
  • Market volatility. Even when oil is trending upwards, periods of volatility can leave traders shaken up. Make sure you stick to a sound trading plan and don’t overreact to sudden swings in oil prices.
  • Value of the U.S. dollar. The price of oil is pegged to the U.S. dollar. So if the dollar goes down in value, oil prices go up, because more oil can be purchased when the dollar is weaker. 

How to sell your oil trade

When selling your oil trade online, here are the five basic steps you need to take: 

  1. Log in to the trading platform you use to trade oil-related assets.
  2. Open your existing trade.
  3. Check the price of the oil trade you own.
  4. Check the spread being offered by the broker to make sure you can sell at a price close to the one you want.
  5. Sell your position. When selling, you’re probably either taking a profit or cutting your loss short.

Oil trading tips for beginners

By now, you should have a better understanding of how to trade oil online. Here’s our oil trading summary, in the form of five tips to follow if you’re a beginner getting ready to make your first oil trade online.

  1. Set your trading goals. Do you want to make money fast, or hold for the long haul? By knowing your trading goals, you can build a sound plan and stick to it instead of getting rattled by emotions when trading oil online.
  2. Figure out your risk tolerance. Whether you’re a risk-taker or the cautious type, the important thing is to know yourself. Evaluate your own tolerance for risk, then you can decide whether you want to make riskier trading moves, such as trading with leverage. 
  3. Know your budget. If you have a small budget, a trading strategy that lets you buy and hold might be a better bet than, say, a CFD (where holding for more than a day can rack up fees, and too many trades can also incur fees, sapping a small budget). If you have a larger budget, you’ll have more trading options at your disposal.
  4. Assess market conditions. Are oil prices trending up or down? Trying to fight against the tide can often end up going poorly.
  5. Pick the oil trading method that works best for you. Trading oil options is very different than buying an oil ETF. Make sure you fully understand the trading strategy you want to follow before you jump in.

Try some of our investment courses for beginners

Not ready yet to trade oil online? That’s ok. Check out our easy-to-follow educational guides to continue your oil trading education.

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By Harry Atkins
Harry joined us in 2019 to lead our Editorial Team. Drawing on more than a decade writing, editing and managing high-profile content for blue chip companies, Harry’s considerable experience in the finance sector encompasses work for high street and investment banks, insurance companies and trading platforms.
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