Oil is one of the most heavily traded global commodities. It is an essential fuel which is used the world over to supply the raw power required for industry. For this reason it is highly prized and in constant demand.
It is also a resource that for the foreseeable future is in finite supply. Geological access to oil resources is becoming ever more complicated, which in turn has forced the price of extraction higher.
These additional costs and increased demand have helped to support the price of what is known as ‘black gold’.
Profiting From Oil Binary Options
Two of the most popular binary options contracts include gold and oil. Oil binary options contracts are split into two distinct types – West Texas Intermediate Crude (WTI) and Brent Crude. These are classified as ‘light crude’ and are differentiated by their sulfur content. Their respective Indices provide a benchmark which is priced in dollars per barrel.
The oil markets are well known for their volatility. The price of oil is particularly sensitive to both changes of economic data and global politics and events. Supply and demand for oil is forever changing and this is turn is reflected in its constantly fluctuating price.
It has been difficult for traders to gain access to this market in the past. Futures and options or investment directly into the fortunes of oil company shares such as Exxon Mobile or BP were one of the few ways that traders could look to profit from this market.
However more recently ETF’s which track the Oil Indices have made this task easier. These can be traded through most stockbrokers, although the relatively high levels of investment required make this prohibitive for many smaller investors.
Crude Oil Trading
Trading oil binary options offers one of the most convenient and low cost ways in which you can profit from this market. With contracts offered by many brokers for as little as $10, the opportunity to profit from movements in the oil price is now within most people’s grasp.
The unique fixed level of profit and liability on each contract also helps to lower risk. This is particularly beneficial in what is often viewed as a potentially difficult market to trade.
You get the same limited risk and flexibility when trading oil using binary options as you do any other asset traded this way. As a result the binary options oil contract offers an excellent way of capturing swings in price and sentiment throughout the day.
How To Trade
Oil binary options can be traded by either focusing on the technical’s, fundamentals or both. While the use of technical methods can provide an excellent way in which to time entries into this market, it would be a brave trader who did not consider the broader fundamental outlook of the market.
To successfully trade oil with using binary options it is important to understand what drives price action in this market. Global supply and demand is the chief driver of price, so disruption to production, whether it is the result of meteorological or political factors will force prices up. Similarly, a slowing global economy will result in lower industrial demand which will put pressure the price driving it lower.
Three important factors should be considered by traders of oil:
- Crude Oil Inventories – The weekly petroleum status report is released weekly at 15:30 UK time by the U.S. Energy Information Administration (EIA). It provides figures on the change in levels of crude oil held by US firms
- OPEC Output and Quotas – OPEC (Organisation of the Petroleum Exporting Countries) is an international cartel that coordinates the oil production policies of its member states. It influences the global oil price by controlling the supply to the market by its members. Adjustments to the production quota up or down affect the international oil price.
- Economic Growth Figures – Growth and GDP data from major economies such as the US and China often have a significant influence on the Oil price. A slowing global economy hints at slowing demand. A growing economy will demand higher consumption to fuel industry needs.
Once a fundamental overview of the oil markets has been attained, technical analysis can then be used to judge precise entry points. Common indicators such as moving averages, oscillators such as the RSI and classic support and resistance levels are ideal tools that you can use to time the entry points when putting together a binary options system for trading oil.
It is however important to take note of the price volatility of this market. Don’t be too rigid in your approach and try to adopt a more flexible trading strategy.
Various ways that you trade oil with binary options include:
Making use of higher or lower contracts provides a core trading approach for this market. Fundamental factors give a good indication of how shifts in price can lead to short and longer term trends. Trading with these contracts offers a way to profit from these moves.
Touch/ No Touch
While many commodities exhibit volatile price action, oil is particularly prone to price volatility. For this reason is can sometimes be preferable to place longer term Touch contracts on this market. Contracts can be placed in the anticipated path of price spikes.
It’s also possible to profit from specifying ranges in which you expect the price to breakout from. On a volatile asset such as oil, using these contracts prior to significant news releases can provide good trading opportunities.
What Else Should I Know?
Oil is by far one of the riskiest assets to trade with binary options. However the fixed risk and limited exposure that you can take when speculating with binary options helps to limit this.
It is also important to remember that assets that are volatile tend to give more trading opportunities. So while these is more risk, the flip side is that you are likely to get more opportunities to trade.
For the basis of a good binary options oil strategy take a look at our trading strategy section to find ideas for creating a profitable approach for trading oil.