Trading Strategies for Crude Futures

Crude oil futures traders can match their trading strategy with their risk tolerance.

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Crude oil futures are known for their high volatility and wide price swings. It’s not unusual for crude oil futures to trade down in the morning but close at a new high when the trading day ends. Traders use several popular strategies that take advantage of crude oil’s unpredictable nature. By analyzing the crude oil futures market, traders select the tactics they believe will result in a profit before the crude oil futures contract expires.

Buy and Hold Trading Strategy

Buy and hold is probably the best known and most widely used trading strategy. Traders analyze fundamentals such as supply and demand and the geopolitical climate, and buy a crude oil futures contract in anticipation of a price increase or sell a crude oil futures contract if expecting the price to fall. The price must make a big enough move to give the trader a profit before the futures contract expires. If the trader’s prediction about the market direction or price behavior is wrong, the trade ends in a loss.

Technical Analysis Trading Strategy

Crude oil traders formulate their investment decisions by applying technical indicators to crude oil price charts over different time periods. Candlesticks, bar charts and volume indicators help traders predict crude oil’s next price move. By using the same technical indicators on a two-minute chart, five-minute chart, one-hour chart and a day chart, traders decide whether to buy or sell a crude oil future. Technical traders often hold their positions open a week or longer to give the trade time to develop.

Swing Trading Strategy

Swing trading involves buying a security and holding it for a short time period that ranges from a few minutes up to four days. Crude oil swing traders rely on short-term changes in supply and demand and technical analysis to determine the market’s trend. Swing traders buy a futures contract if the market is trending up and sell if the market trends down. Crude oil futures swing traders benefit from crude oil’s volatility and will close out a trade when it makes a small profit. Swing trading is very risky, and traders can lose money quickly if the market unexpectedly moves against them.

Spread Trading Strategy

Spread trading involves buying one crude oil futures contract in one month and selling another crude oil futures contract in a farther out month. The goal is to profit from the expected change between the purchase and selling price of both contracts. For example, a trader could sell the March crude oil futures contact trading at $94.50 and buy the June contract for $95.80, for a difference of $1.30. If the trade widens more than the $1.30, the trader has a profit. The trader would buy a March contract and sell a June contract to close out the trade. But if the spread contracts, the trader will realize a loss.