How to trade Oil with Binary Options – Trading tutorial
Crude oil is at the centre of the world’s economy and in terms of trade, it is the most traded commodity among all the commodity assets. Without crude oil, there would be no transportation of any form (can’t imagine rowing a boat from Alaska to Japan or riding a bicycle from the UK to South Africa). There would be no industries, no way to cook without degrading our already fragile environment, and life as we know it would be radically different. This is why countries have gone to the lengths of going to war to secure rights to land and water carrying crude oil deposits, or secure supply routes for the product. That is just how important crude oil is.
As far as international trade goes, the value attached to a barrel of crude oil is a function of the demand and supply dynamics for the product, and it is this change in value on an intraday basis that provides the platform on which traders can go short or long on the crude oil asset.
How Crude Oil trading is done
Just like most commodities, crude oil is traded on a spot and futures basis. It is also traded in the binary options market.
Three forms of crude oil are traded in the world oil markets:
- Light sweet crude (CL)
- Brent crude
- West Texas Intermediate (WTI)
Crude oil futures contracts are traded on the New York Mercantile Exchange (NYMEX), the Intercontinental Exchange (ICE). The light sweet crude and WTI contracts are traded on NYMEX and Brent Crude on ICE. The price feeds are sent from these exchanges to the platforms of the various binary options platforms from where traders can perform different types of trade contracts on them.
In trading crude oil, traders have to understand the contract specifications and leverage/margin requirements for trading the crude oil contract. Unlike the futures contract which is made up of 1,000 US barrels (i.e. 42,000 gallons) and which requires a minimum of $4000 to trade the smallest contract, a trader can trade a minimum of $25 in the binary options market. As experience is gained, larger amounts can be committed into the trade. Some trade contracts in the binary options market last for as little as 15 minutes. This allows the trader the opportunity to make money again and again using little risk to compound returns.
Two trading times exist for trading oil:
- The NYMEX Open Outcry trading session lasts from 9am to 2pm EST, Monday to Friday.
- The eCBOT (electronic trading) session lasts from 7pm to 6.15 pm EST (next day), Sunday to Friday.
It is at these times that the crude oil asset is available for trading in the binary options market. Traders who want to trade oil must therefore convert these times to their local time so as to trade during the market hours.
Procedures for Trading Crude Oil in the Binary Options Market
After the trading account is opened, activated and funded, the trader can start off the business of trading oil. Trading oil as binary options will follow technical and fundamental principles.
Technically speaking, the trader can employ chart patterns, candlestick patterns and technical indicators to derive signals on the charts. The kind of signal to be used will be determined by the trade type the trader has in view. For instance, a trader who wants to trade the Touch/No Touch option will be more interested in not just deriving the direction of the asset, but getting a key price level that the price action will either breach (Touch) or fail to reach (No Touch). For instance, a trader who decides to use a resistance level to trade the Touch/No Touch for an uptrending price action can use this level as a Touch strike price and a price above this as a No Touch strike price if there is enough evidence that the asset will be beaten back at the resistance point. This is not as simple as it sounds and many factors will come into play, especially the fundamentals of the crude oil asset.
Crude oil is an asset which has strong fundamental backing. We live in a world where the slightest hint of trouble in the world’s oil producing areas can cause a shift in price. The outbreak of the Libyan Civil War in February 2011 led to a 400 pip upside gap on the first trading day following the weekend when hostilities began. The setting of quotas by Organization of Petroleum Exporting Countries (OPEC) always has an impact on oil prices. These factors will determine where prices go, how far they go, and will also shape the technical plays that will produce the signals used in trading oil on binary options platforms.