If you are familiar with the mechanics of buying and selling stocks online, then you are already acquainted with the fundamentals of trading futures. While the basics of oil futures are comparatively simple, there are a few variables to keep in mind.
Each unit size is different for every separate futures contract. A contract for crude oil equals 1,000 barrels of crude oil. Consequently, the underlying futures contract rises or falls in worth by $1,000 for every one dollar of movement in the price of crude oil.
The first step is to open an online futures trading account through your brokerage. You can either fill out your application online or have it sent by mail.
In order to determine if futures trading is appropriate for you, you will be asked to provide your financial information such as your investing experience, income, and net worth.
There will also be many pages of risk disclosure to make sure you are aware of the perils intrinsic to futures trading. When you are approved, then you can deposit money into your account.
Research And Analysis
It is always important to do your research when investing in oil futures. Consult available charts, as well as read the report on supply and demand published weekly by the American Petroleum Institute.
Taking into account geopolitical imbalances in oil producing nations, and weather patterns that may impact oil production, determine current supply and predicted demand.
It is important to conduct technical analysis, including candlestick charting, watching increases and decreases in trading volume, and analyzing the appropriate charts to get an idea of where the market may be heading.
Once you have determined the number of crude oil contracts you would like to trade, deposit the first margin amount needed. You brokerage will inform you as to what the account requirements, due to the fact that these requirements fluctuate with the volatility and price of the benchmark commodity.
Using the research and analysis that you have done, decide whether you think that crude oil’s price will increase or decrease in the near future. Whether you believe the price will rise or fall will determine whether you take a long or short position.
Opening The Trade
Go long (buy) the amount of contracts you would like, if you think that the price of oil will rise in the future. If you think the price of oil will drop go short (sell) the amount of contracts you want. For every one dollar the price rises or falls, depending on your position, your contracts will increase by $1,000 times the number of futures contracts you possess.
Of course, the opposite is true if the market turns against you, and you may find yourself in a situation where it may be necessary to add additional funds to your account to maintain your position.
Closing The Trade
When you close a trade you take the opposite position you took when opening the trade. If you took a long position, sell, if you took a short position, buy the contract.
Remember that due to its inherent leverage in futures trading, you may face the entire lose of principle, and then some. Trading oil futures is not for everyone, and you should carefully consider your personality and risk tolerance level before committing any capital.