The Basics of Trading Oil

    Trading oil is exactly the same as trading Forex, stock indices, or anything else. Trading, as opposed to buying shares, allows two big advantages. The first is that we can profit from falling prices just the same as rising prices, by selling rather than buying. The second is 'leverage' which allows us to effectively buy huge quantities with just a small deposit. This means we can pocket a decent profit from a small move up or down in price. Of course, this is potentially risky but we always put in an automatic 'stop loss' to close the trade should the price move against us by a set amount. Likewise, we put in an automatic 'limit' to close the trade for a set profit.

    Many Forex brokers also allow you to trade oil, so setting up an account is no problem at all. Forex is mostly traded on the MetaTrader 4 platform and this often includes oil without people realising. In fact, most MetaTraders have all sorts of additional instruments, often shares and sometimes even including the DOW. To reveal these, you need to right click in the Market Watch window (where the currency pairs are displayed) and click on 'Show All'.

    We obtain our signals from a free, everlasting demo version of MetaTrader but you can actually place the trades anywhere you like, including spread betting. The amount of capital you require varies from broker to broker but most will trade mini contracts and need only a few hundred dollars in your account. The actual risk will be even lower than this because we put in a stop of 90 pips (a $0.90 move on the price of oil). MetaTrader shows the daily 'spot price' for oil and both this spot price and the oil 'futures price' are available depending on which broker you use. The futures price is simply an estimated price for oil for  delivery at a set date in the near future. It really makes no difference to our trading.

    Here is how a typical trade works. We see that the quoted price is 81.50 - 81.56 so this means that we can buy at 81.56 oil and sell at 81.50 - the difference in prices being the broker's profit. We have a sell signal on our chart, so we sell 0.1 contracts or $1 (or £1) a pip. Now, a 'pip' is the smallest movement, which in this case is 0.01 or a one cent move. At the same time, we put in a stop loss at 82.40 (90 pips up in the 'wrong' direction because we are selling and want the price to go down) and a take profit of 80.00 (150 pips in the hoped-for direction). Then, we simply wait anything from ten minutes to five hours, on average.

    However, if the TCCI changes colour, we manually close the trade (although, you can just leave it and wait for the stop or limit to be hit). Usually, we hit the limit and the trade is automatically closed by the software and the $150 deposited in our account. Of course, ideally we trade for a lot more - $10 a pip or greater. For example, trading a whole contract would have resulted in a $1,500 profit, which is quite realistic and not too bad for a few hour's 'work'!