The crude oil price has always been of great interest to traders, since it is a very popular asset that correlates with many currencies, such as the Russian ruble and the Canadian dollar.
This article is going to reveal how the trader can make money on the fluctuations of the crude oil price and give you certain tools designed to find winning trades on the asset chart.
The crude oil price is sensitive to market laws and is based on the supply and demand balance.
Here is an important rule:
Quotes are more driven by expectations rather than facts.
Let's take a look at an example. The coronavirus outbreak, which began in China in December 2019, has resulted in a business slump. Millions of people have been quarantined. International interactions have been minimized. Exporters and importers have suffered greatly worldwide. This means that global GDP growth has slowed down.
For the crude oil market, a slowdown in global economic growth means sagging demand for energy carriers. However, supply remains stable. When supply exceeds demand, crude oil prices drop.
That being said, this is largely due to expectations, since specific figures, which show damage from coronavirus, are not immediately known.
If you wish to make money on fluctuations of the crude oil price, you should determine the local direction used to open positions and entry points. To that end, it makes sense to use technical indicators included in the standard kit of the MetaTrader 4 trading platform. By using these indicators, you can determine the trend direction (to be used with the trend strategy), price reversal points, and volatility range.
The trend direction can be determined by using trend indicators, such as a go-to tool, the moving average. If you wish to determine price reversal points, you need an oscillator. It may be the stochastic oscillator that is one of the most popular indicators in this group. And finally, there is the average true range (ATR), an indicator that gives an idea of the daily volatility range.
The crude oil price you make money on follows trends just like other exchange-traded instruments. The fundamental trading rule has it that trend is your friend. By determining the trend direction, you can understand what type of trade to open. In case of a downtrend, you should sell. In case of an uptrend, you should open buy trades.
The moving average is meant to show the trend direction. If the indicator line is below the price chart, this points to an uptrend, and vice versa - when the price is below the moving average line, this is a downtrend.
When you place the moving average on the chart, you need to wait for signals to open a position. When the crude oil price crosses the moving average line downwards and consolidates below this line, you can open a sell trade. When the chart crosses the moving average upwards and consolidates above this indicator, you should open a buy trade. When the opposite signal appears, you need to close the position.
Keep in mind that each trading instrument and timeframe requires custom settings of the moving average. Take a look at the example below where we are using the standard 14-day period for the H4 timeframe. In this case, we have the exponential moving average.
Moving averages only work when there is a pronounced trend on the chart or when the crude oil price rises or drops. When there is a sideways trend, this indicator generates false signals.
Within a specific period, each trading instrument has its own volatility amplitude or range calculated in pips. It is called the average true range (ATR).
Why should a trader know the ATR of the crude oil price? This indicator is used to spot the movement potential and not to open a trade when the directional movement is almost over.
The ATR indicator opens in a new window under the chart and resembles an oscillator. However, it should not be used to determine oversold and overbought conditions.
It works differently and performs different tasks. As it moves, the ATR curve shows how the instrument volatility changes. However, the most important thing we need to know is the current range of crude oil prices. To that end, you should hover the mouse pointer over the indicator line and read the value.
Once the data has been received, you need to check how far the crude oil price has moved in terms of the ATR percent. If it exceeds 20–30%, it is too late to open a position, since you won’t get a favorable stop loss and take profit ratio.
Stochastic’s key task is to show the overbought and oversold levels of an asset. The indicator window that opens below the price chart demonstrates an overbought area above 80 and the oversold area below 20. When the crude oil price enters one of the above-mentioned areas, this does not serve as a trading signal. For now, we should only keep an eye on the price.
A signal to open the trade is generated when the Stochastic lines come out of one of these areas. Thus, the exit from the overbought area as shown in the chart is a sell signal. We can see that the crude oil price dropped following its formation.
The divergence formation is another Stochastic signal. This is a divergence or convergence of trend segments drawn along the extrema of the indicator and chart. In our case, the divergence formation gives a signal to open a short position, and we see that the price of crude oil is going down.
To profit from crude oil price fluctuations, you need to have a trading strategy. You can work it out based on a combination of the indicators described above.
Use more than one indicator to filter off false entry points and get a confirmation of the trade’s accuracy. To achieve this, all three indicators should provide the same signal.
Aside from that, you can couple your trading strategy with technical levels. And, of course, make sure to test it out properly by picking the most effective instruments to make money on crude oil price fluctuations.