A
broker is an individual who executes buy and sell orders and get commission in
the form of SPREAD (I will talk about SPREAD in the subsequent lessons). You
trade through your broker. You buy from your broker at a price and sell to him
again at another price and that’s all.
In order to buy or sell Crude Oil, you need
to set up an account with a broker. Most of the brokers that allow currency
trading can also make available commodity trading. In other words, A FOREX
broker can also make available CRUDE OIL trading since both paper contracts
( you don’t take possession of what you are trading). In a
nutshell, FOREX brokers are also called CRUDE Oil brokers. You don’t physically
need to visit a broker to open an account. It does not matter which country your broker is based. Money can
always be transferred between your trading account and your local bank
(Domiciliary account)easily. There is no special procedure of opening an
account, you just move straight to the site of a broker and sign up for a
trading account (which could be a DEMO account or a REAL account)
QUALITIES OF A GOOD BROKER
• Low
spread
• No commission (must not charge any other
money apart from the money made from spread)
5
• Universal account allowing you to place
either a mini or regular trade from the same account.
• A
good trading platform with lot of functionality
• A
reliable service along with good customer care
• Prompt execution of orders immediately it
is placed
• Make sure your broker is reputable and
been around for some time.
THE PLATFROM
A
good functional trading platform is more important than many other factors. A
trading platform is a software package provided by the broker which contains
charts, prices, news, tool bars and a whole lot of other information which will
allow you to make informed decisions and place trades directly from the
PLATFORM.
The platform is easy way to place trade
without having to call your broker every time you want to buy or sell crude
oil. It consists of dealing rates, charts, account information, tool bars,
trade options and lots more which can be selected with your mouse.
After you have learnt the techniques of
trading CRUDE OIL, you will be able to place trades by clicking on crude oil
and perform either a buy or sell action on it from the platform.
I
will recommend AVA FINANCIAL as your Broker. I have been using this broker for
a longtime and I tell, they have quality service with good customer care. You
can also trade currency on their platform and the broker is regulated.
For
more information, you can visit www.avafx.com
6
GETTING STARTED
One
basic advantage of the crude oil market is that brokers offer free DEMO account
to practice trading with real time resources like news, charting service, live
crude oil rate through out the world on the same state of the art software
package for live trading. This DEMO
account provides the opportunity for intending traders to practice with virtual
money before trading with real money since you can practice with your hard
earned money.
With
demo account, you experience the same dynamic market action and go through the
same process of making decision based on events around the world (fundamental
analysis) and reacting to charts (technical analysis). There is no difference
between how the market reacts on the Demo account and the live account.
Demo
account helps to understand both the market and the platform but at the same
time you need to be careful of how u trade with the demo account because you
might cultivate some bad habits which will not help you when you start trading
with real money. So,TAKE THE DEMO MONEY AS IF IT IS YOUR REAL MONEY. How long
you trade demo account before moving to live account depends on you. But I’ll
advise that you demo trade very well before you trade with your real money. The
more time you spend on demo account, the more you understand the market and the
more professional you are.
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HOW DO I OPEN AN ACCOUNT?
1. Visit
www.avafx.com
2.Click on open a DEMO account
3.Fill out the blanks spaces provided on
the form provided
4.Download the AVATRADER software
5.Click and enter the username and password
you provided when opening the account.
The here you are on the platform. Click on
the forex column and then scroll down to crude oil and click. Then the crude
oil chart would be displayed.
TYPES OF ACCOUNT
There are two types of account, which are
the MINI and
REGULAR/STANDRED account.
MINI ACCOUNT: ranges $1-$999
REGULAR ACCOUNT: ranges $1000 upward.
TERMS ASSOCIATED WITH OIL AND GAS
The
first thing to understand about this market is that crude oil is traded against
US dollars i.e. when you buy crude oil, you are automatically selling Us
dollars in anticipation that the price of Crude oil will increase. if the price
of Crude oil is falling, you sell Crude oil automatically buying U.S dollars.
If you can do exactly this, then you are set to make money in this market.
MARGIN:
This is the amount of money you invest with
your broker i.e. the amount required by your broker to be in your account. In a
case where your account falls below the margin requirement, the broker’s
dealing desk will close all your positions.
LEVERAGE
This is the amount of money you borrow from
your broker to trade. It gives you the ability to control a large amount of
money with a very small capital. This give you the ability to make
extraordinary profit and at the same time minimum risk. The leverage provided
by Ava financial is 200: 1 for FOREX and 100:1 for CRUDE OIL.
Leverage calculation is simple, just
multiple your margin by the leverage provided by the broker.i.e
$200 x 100 = $20,000
This means you can control $20,000 worth of
contract with your $200. It is very important that you know that for leverage
to be a great advantage to you, you must always trade with caution. In other
words, practice good money management (I will explain that in subsequent
lessons.
GOING LONG AND GOING SHORT
As earlier said in the crude oil market you
buy and sell crude oil as the price fluctuates in the international market. The
beauty of this market is that you make money when you are buying and also when
you are selling ie. You make money in both bearish and bullish (rising)
conditions. Buying crude oil is also referred to as GOING LONG and selling
crude oil referred to as GOING SHORT.
NOTE: You buy crude oil when you have
properly analyzed that the price of crude oil will rise and you sell crude oil
when you have properly analyzes that the price of crude oil will fall.
RATE, SPREAD, BID AND ASK PRICES
Rate is price of crude oil in the
international market. It ends with 2 decimal points e.g.102.00.00. It appears
on the platform in this form 102.25/102.30. The first rate in the pair is the
BID PRICE while the second price in the pair is the ASK PRICE.
ASK PRICE: is what you pay if you are buying crude oil and always higher
than the BID price.
BID PRICE: is the amount you get when you are selling
crude oil
SPREAD: is the difference between the BID PRICE and the ASK PRICE.
This goes to the broker on every position you open. I call spread the Brokers
commission. The spread for crude oil is 5pips i.e. every time you open a
position the broker gets 5 pips.
MARKET POINT
In
the crude oil market. Price are quoted in pips. Stands percentage in point’ and
it’s the second decimal point. A pip is the smallest movement to price and it
determines the profit /loss of the trade. In order to make money, a crude oil
trader must capture as many profitable pips as possible.
If crude oil price is quoted as 100.45 the
second decimal point represents a pip. So if the price falls from 98.50 to
97.50, then that is 100pips difference.
IP VALUE: the value of a pip is determine
by the leverage provided by the broker and the amount of money you use in
trading. For example, if broker provides 100:1 leverage and you are trading
with $50 out of your account. You have:
50 x 100 = $5000 since you have been
leveraged to $5000 then the value of each pip would be 50cent. Also if you are
trading with $100 out of your account, then you would be leveraged to $10,000.
The value of each pip would be $1.i.e. for every increase or decrease in pip,
you are either making or loosing $1.Below is a guide to pip value for different
leveraged amount:
Trading with $20, leverage to $2,000 =
20cent/pip
Trading with $50, leveraged to $5,000
=50cent/pip
Trading with $100,leverage to $10,000 =
$1/pip
Trading with $200, leveraged to $20,000 = $2/pip
And so on. So if you are trading with 100
dollars and you bought crude oil at $98.30/barrel and the price appreciate to $
100.30/barrel, them you have been able to capture 200 pips and the amount you
have made is $200 because the value of each pip is $1.
Try as much as possible to capture as many
pips as possible on every of your trades.
MARKET ORDERS
A
market order is an order that is given to a broker to buy or sell crude oil at
whatever the market is trading for at the moment. It can be an entry order into
the market or an exit order to get out of the market. Crude oil traders use
market orders when they are ready to make a commitment to enter or exit the
market.
ENTRY ORDER: is an order to buy or sell crude oil when
it reaches a certain price. At that price the position would be opened for
instance if after analyzing the crude oil market you discovered that if the
price gets to $100.00/ barrel it will all to as low as $90/barrel then you can
set an entry order to be $100.00. In this since the price will eventually fall
to $90.00 then you would have made 100pips. It is also called pending order.
STOP ORDER: is an order placed to exit the market
automatically after a certain level of loss. I.e. when a trade is against you
stop order is placed to stop at a particular extent of loss. For example you
place a buy order at $90.00/barrel anticipating that the price will rise
further but unfortunately the price continued falling, you can set a stop order
at $89.40 so that you would not loose more than 60 pips. At $89.40 rate, the
position would be closed automatically.
LIMIT ORDER: is an order placed to exit the market at
a certain level of profit of profit has
been attained.for example, you have analyzed that the price of crude oil would
rise further from 100.50 the present market price, you can then set you limit
order to 101.20. At 101.20 the position would be closed automatically and you
would have made 70 pips out of the market.
METHODS OF TRADING CRUDE OIL
Recall
that I said crude oil is traded against U.S dollars, but you will see only
crude oil on the platform not paired. In other words, when crude oil is rising
then Dollars fall and vice versa.
in
this market you make money from predicting future price based on solid analysis
of the market and basically, there are two methods by which you can forecast or
predict future prices. They are TECHNICAL AND FUNDAMENTAL ANALYSIS.
The technical analysis studies the effects while the
fundamental analyst studies the causes of market movements
TECHNICAL ANALYSIS –AN INTRODUCTION
Technical analysis is the study of market
data such as historical and current price data and volume in an effort to
forecast future market activity. historical price data is the most commonly
used available data that is implemented into the analysis.
Historical market data is saved and forms
charts over various periods of time. The technical trader can analyze varying
periodical charts over a specific length of time for the basic purpose of
picking the entry and exit levels of a trade. By studying the chart the
chartist is able to get information at a glance that will hopefully represent
the direction of the instrument in the future.
Over the years various mathematical
manipulations were placed upon market prices and volumes. Theses manipulations
(known as studies) helped the technical analysis focus on identifying the trend
and the entry and exit levels.
As with any analysis, discipline is the
most important aspect of the study. If your studies showed that something was
to occur, then follow your studies-do not let the market change your plan. If
you were wrong then you were wrong, but stick to your game plan.
1.
TECHNICAL TRADING GUIDE
1.Chart the Trend and Range Bound Markets
Use long term charts to decide trends or
range bound markets. Begin a chart analysis with daily, weekly and even monthly
charts spanning several years if possible. A larger scale chart essentially
shows the life of the market and provides clearer visibility and a better
long-term perspective on a market. once the long-term has been established,
consult daily and intra-day charts, these charts can include anything from say
10minute to daily charts. A short-term market view alone can often be
deceptive Even if you only trade the
very short term, you will do better if you’re trading in the same direction as
the intermediate and longer-term trends. If there is no trend then a different
strategy is necessary, possible playing the range until the market begins to
trend once more.
2.
Follow the Trend
if
you determine the trend, then follow it. Market trends come in a variety of
terms-long-term, intermediate-term and short-term. The first thing you have to
determine is what type of a trader are you, long term or day trader, that
decision will determine which charts you should be using. For instance, if
you’re day trading, use the daily and intra-day charts, but always use the
longer-term range chart to determine the trend, and then use shorter-term chart
for timing. make sure you trade in the direction of that trend and then buy on
dips if the trend is up and sell on rallies if the trend is down.
3.
Locate Support and Resistance Levels
Find
the support and resistance levels. As about when you want to buy an instrument,
its best to buy near support levels. The support is usually a previous reaction
low. Using the same logic, the best place to sell an instrument would be near
its resistance levels. The resistance level is usually previous peak. After a
resistance peak has been broken, it will usually provide support on subsequent
pullbacks. In other words, the old high becomes the new low. In the same way, when a support level
has been broken, it will usually produce selling on subsequent rallies- the old
low can then become the new high.
4. Moving
Averages
Moving
averages often provide objective buy and signals. Hence, they should be
watched. They show you if an existing trend is still in motion and help confirm
a trend change. Do not rely on moving averages to tell you in advance if there
is a trend change imminent; use it as a back-up to your chart analysis for
trend identification. A combination chart of two moving averages is the most
popular way of finding trading signals. Signals are given when the shorter
average line crosses the longer. Price crossings about and below a 40-day and
200-day moving average also provide good trading signals. Since moving average
chart lines are trend-following indicators, they work best in a trending
market.
5. Oscillators
Oscillators
help identify overbought and oversold markets while moving averages offer
confirmation of a trending market, Oscillators can often warn us in advance
that a market has rallied or fallen too far and will soon turn or retrace. Two
of the most popular oscillators are the Relative Strength index or RSI and the
stochastic. Both these oscillators work on a scale of 0 to 100.with the RSI,
readings over 70 are overbought while readings below 30 are oversold. The
over bought and oversold values for
stochastic are 80 and 20. Oscillator divergences often warn of market turns and
as opposed to moving averages they work best in range bound markets. Weekly
signals can be used as filters on daily signals. Daily signals can be use as
filters for intra-day charts.
.
6. Know
the Warning Signs
The
Moving Average Convergence Divergence (MACD)
Indicator combines a moving average
crossover system with the overbought/ oversold elements of an oscillator. A buy
signal occurs when the faster line crosses above the slower and both lines are
below zero. A sell signal takes place when the faster line. Longer-period
signals take precedence over shorter-period signals. The MACD histogram plots
the difference between the two lines and gives even earlier warnings of trend
changes. It’s called histogram because vertical bars are used to show the
difference between the two lines on the chart.
8. Trend
or Range Bound Market
The
Average Directional Movement Index (ADX) line helps determine whether a market
is a trending or range bound phase. It measures the degree of trend or
direction in the market. A rising ADX line suggests the presence of a strong
trend. A falling ADX line suggests the presence of a trading market and the
absence of a trend. A rising ADX line favors moving averages; a falling ADX
favors oscillators. By plotting the direction of the ADX line, the trader is
able to determine which trading style and which set of indicators are most
suitable for the current market environment.
9.
Study
Technical
analysis is a skill that improves with experience and study. The more you learn
and practice the better you’ll be, keep studying, fine tune methods, learn what
works for you and what doesn’t and remain technical and not emotional.
FUNDAMENTAL ANALYSIS
Fundamental
analysis is the study of economic, social and political data that represents
and quantifies the economy in question with the goal of determining future
movements in a financial market.
Analysis
have been grouped into either Technical of fundamental camps for years but if
truth be told there are very few pure technicians or fundamentalists. Technical
analysts cannot really ignore the effect and timing of economic announcements
and fundamental analysts cannot really ignore various signals derived from the
study of historic prices and volatility.
BASIC GUIDE TO FUNDAMENTAL ANALYSIS
•
• Economic
Calendar
Know exactly when each economic indicator
is due to be released. Try keeping a calendar on your desk or trading station
that contains the name of the indicator the data and time as well as the
expected release. Often it’s not just the announcement itself that moves the
market but the anticipation of an announcement may move the market sometimes
days weeks prior to the release.
Understand the Announcement
Understand what particular aspect of the
economy is being revealed in the data. there are several aspects of an economy
that are measured from Growth such as GDP, inflation such as PPI or CPI,
Employment such as Non-farm payrolls, interest rate announcements, Confidence
such as consumer Confidence or Spending and so on.. After you follow the data
for economic indicator and what part of the economy they are relating to.
3.
Know the Indicators to Concentrate on
As
mentioned before there are a myriad of indicators that are released daily, it
would be impossible to follow them all religiously, and it may well be a waste
of time. Some move markets others don’t – concentrate on the ones that do.
However economic indicators are not static over the years some have gained
greater importance and others have become less important –keep up to date.
4.
Anticipation
The
data itself may not be as significant as the difference between market
expectation and the actual result. As mentioned earlier it is important to know
the expectation by the market, expectations are then built into the price of
the instrument. What is not is an unexpected figure or event. This is sometimes
felt not only by the announcement itself but by the wording joined with the
announcement. for instance an expected 0.25% rate hike may not change the market as it was expected.
However the wording following the announcement that there will not be any
further hikes may in fact move the price.
5.
Understand the Release
Not all
unexpected releases trigger a move in the market. contained in each new
economic indicator released to the public are revisions to previously release
data. Sometimes these can be ambiguous for instance, if durable goods rise by
0.4% in the current month and the market is anticipating them to fall, the unexpected
rise could be the result of a downward revision to the prior month. Check out
the revisions to older data because in this case, the previous month’s durable
goods figure might’ve been originally reported as a rise of 0.4% but now, along
with the new figures, is being revised lower to say a rise of only 0.1%
therefore, the unexpected rise in the current month is likely the result of a
downward revision to previous month’s data.
MONEY MANAGMNT IN CRUDE OIL TRADING
•You should not more than 2%-5% of your
margin account on a SINGLE trade. This is because this market it very volatile
and has the ability of moving 500-700 pips in a day. lets assume that the value
of each of your pip on a particular trade on 2%-5%of your account is 50cent and
you are able to capture 400 pips, this means you have made $200 and that trade.
If you are able to make 10 trades with that kind of outcome in a month, then
you have made $2000 that month. Remember that slow and steady; wins the race.
•Set reasonable limit and stop orders on
every position.
•Analyze the market very well before opening any position.
Market
movements could be very tempting at times and this could let you open wrong
positions. So be careful!
I
hope I have been able to impact this knowledge of oil and gas trading to some
extent. Remember to practice good money management and analyze the market very
well any time you want to open a position
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