Crude oil is the most traded commodity in the world, and with so many potential uses, it’s clear to see why it’s commonly known as ‘liquid gold.’ The short-term and long-term value of oil is vastly recognised by both experienced and beginner traders, with several options for trading opportunities.
In the oil trading market, the assets are priced per barrel, and can be traded using oil futures, options or contracts for difference (CFDs). But, along with the high gains and varying trading possibilities, the oil market comes with high risks, and because of this, there’s a few mistakes that those beginning to trade in this market should avoid making.
Don’t Start Trading With Huge Amounts Of Capital
As a beginner, the biggest and possibly easiest mistake oil traders make, is trading with too much money. First, we recommend trying your hand at day trading, as this will allow for a smaller investment, due to indirect safety features that control the risk capital of its traders. Like with any investment, you should have a significant portion of risk capital when trading oil future contracts, allocated specifically to speculative activity and used for this high-risk, high-gain type of trading.
Don’t Stick To Just One Type Of Trading
Although futures are commonly used to trade oil, you should also consider trading with CFDs, as this gives you the opportunity to use leverage. Oil CFDs are a financial derivative, which allows traders to speculate and follow price changes in crude oil futures, and by using leverage, enhance your original investment. If you trade oil CFDs on Plus500 then you gain access to more of the market with less capital, compared to traditional trading, multiplying your investment and allowing you take a larger position on the oil futures’ price movement.
Don’t Avoid Doing Your Research
It may seem tedious, but not spending enough time on the research before starting to trade oil can lead to a huge downfall. Many beginners jump head-first into trading in this market on the back of a referral from a friend, or a trending news story. This is all good to pique your interest in the oil trading market, but could incur huge loses in a risky environment.
Take the time to research exactly what a commodity is and how they work. You should be able to understand how to trade oil, the benchmarks used to set the price, and the different trading styles available. Remember, there are several factors that can affect the oil market, making it subject to volatility and not always reliant on the level of consummation and inflation. So, knowledge of environmental and political impacts, the workings of a physical asset, and supply and demand, is vital for a beginner. Talking to experienced traders or brokers, or reading the supplied information on trading platforms, is a great place to start, before you begin trading.
Don’t Go Against Your Trading Personality
One of the failures that a beginner trader can encounter is a lack of money management skills. This is a way to maintain the risk of the oil market, with various techniques to boost profit. But before you apply a money management strategy, you should first choose an approach that fits your trading style and personality. Think about what type of trader you are or want to be. As a beginner, it’s recommended to start as quite a conservative trader to enable a stable return on your investment, so your money management approach should reflect that. This will allow you to make the right decisions for the type of trader you are and ultimately avoid loss.
Don’t Follow Herd Mentality
It can be so easy to be influenced by the next trader; if they go short, you think you have to go short – if they go long, then so do you. This is a common mistake that a lot of traders make. As a volatile market, you should consider the fact that you are the best judge on your own investment and how you use your capital. After all, you should have done all your research before making the trade, and have a plan in place.
It’s correct to consult with experienced traders, but if you have monitored the oil prices on a daily basis, and have a strategy in place, then do not complete a bearish or bullish action just because somebody else is doing it. This can be applied to not only when trading oil, but also to the wider commodity market.