Basics of Trading Crude Oil Futures Contracts
Last updated on February 13th, 2020
Trading Crude oil futures is a market that when it comes to day trading, is my top pick.
For years now, it has offered enormous profit opportunity due to its highly active price action and range.
As dynamic as this market is, there are aspects that are important to be aware of if you want to succeed at crude oil futures trading.
Crude oil futures, and more specifically, ‘light sweet crude oil futures’ are traded on the NYMEX Exchange (New York Mercantile exchange). The trade pit opens at 9 am est and trades until 2:30 pm, but there is also a very active electronic market which trades on globex from 6 pm est, Sunday through Friday.
Like all major commodities futures contracts, crude oil futures contracts are standardized.
The front month contract is what we want to focus on because that is where the majority of the volume is.
- Each contract consists of 1,000 barrels.
- The prices move in 1 tick increments.
- Each tick is equal to .01, or one cent, US.
- Therefore the value of each tick is $10, making very small moves in price a very lucrative and/or risky proposition.
For example, if one were to trade a single contract of crude oil futures that moves just .10 in price, $100 would be made or lost, plus trade costs (commission, exchange fees and slippage).
Crude Oil Contract Rollover
Each month, around the 18th, or the closest Friday to the 18th, we typically ‘roll’ to the next front month contract.
During the Thursday and Friday around these monthly dates, you will notice the trade volume begins to migrate from the old month to the new.
We always want to focus our trading on the contract with the most trade volume.
There are also mini contracts of crude oil futures traded on the CME. At first appearance, you might be drawn to these because they require much smaller capital levels to safely trade.
The only problem is that most traders have not really taken to these smaller contracts and the trade volume is just not sufficient for us to attempt trading these products.
Focus on the full size NYMEX contract for better trading.
I have personally called live trades in a virtual trade room for many years and crude oil futures has been one of the best, most consistently active markets that I have focused on throughout my trade room experience.
Because of this price action, we can look forward to lots of great trade opportunities.
How To Trade Crude Oil Futures
All the best strategies that I have found the most success with, are rule based methods that tend to focus on momentum style trade setups, or reversal trades.
They are very controlled, with specific targets, entries and stops.
For me, the best strategies utilize multiple positions and for that, you do have to be adequately capitalized. If not, then begin with a single position and trade it to a specific target.
With two positions, which is my preferred method, I like to exit at a specific target with one position, and then trail the 2nd position per my trade plan rules and techniques.
I also like to move my stop to lock in a little profit or to eliminate the risk on the trade as quickly as possible, also per the rules and techniques of my trade plan.
Your trade plan should also be quite specific as to when to start each session and when to quit. This is the kind of market that you probably do not want to over trade.
My Personal Trading Plan Is As Follows
I begin at 8:50 am each session.
My quitting goals are dynamic and typically require one or two winning trades and a positive result.
If the session begins with losses, then we have to keep trading until we get positive or, until we reach a designated stopping time.
Many traders have a hard time knowing when to stop trading and that usually leads to problems. Each trader is different, and typically requires personalized rules to accommodate them so figuring out the proper quitting time requires some initial research.
Some traders only trade for 30 minutes and 3 trades maximum for example, while others will just power through the entire session or until they hit their winning goals.
Still others, and this is something I would suggest one focuses on, will research by back testing, all the trades that their strategy produces throughout several months of trading, and then isolate the most productive and least productive windows of time.
An interesting trade plan can then be applied that treats each session as 2 to 4 mini sessions, each with its own start and stop time, only focusing on what has been historically shown to be the most productive time slots to trade crude with their specific trade method.
I personally like using the PTU Trend Jumper strategy which has a very specific approach to this market. It’s the perfect strategy to set up mini sessions because it produces excellent setups.
When you combine these setups with smart trade plan rules, you can consistently produce profitable results.
Vital Key To Any Trade Strategy
There are other effective strategies too, but regardless of the strategy, I have found the most consistent success by trading it the same way each and every session, with a purely mechanical approach.
In other words, there is very little room for discretionary trading.
I’m not saying one couldn’t be successful trading crude oil futures by ‘touch and feel.’ I just haven’t known anyone that has succeeded at it.
This market offers up the same type of price action and price patterns over and over again so, armed with that information, I prefer to use a rule based mechanical strategy that takes advantage of that and in so doing, puts the odds in my favor on each and every setup.
Winning at futures trading is all about odds.
There is no such thing as perfection.
The good news is, we don’t need perfection to succeed.
We just need to put the house odds on our side. The strategies we use give us ‘better than house odds,’ in fact.
I don’t need to win every trade to make a lot of money trading crude oil futures.
Winning every trade isn’t possible anyway.
So I focus on quitting positive on most sessions and staying consistent with my approach. As long as your strategy offers up a positive average profit per trade, net of all winners and losers, you can be successful trading crude oil.
Of course, you also need to couple that up with very smart and conservative risk exposure and money management. In other words, you have to be adequately capitalized to trade crude oil futures.
You never want to risk more than 2% over your trade capital on any given trade and you should apply the philosophical concept that less is more.
Focus on quality of the trading opportunity and not quantity.
Give you plan a chance to produce for you. By letting the odds do all the heavy lifting for you, your account will ultimately ‘ramp up,’ and as it does, you can increase your position size while still sticking to the quality vs quantity concept.
Those that over trade, that is, trade for quantity, tend to have lower net profit results per trade or worse, can’t find a way to quit positive on most sessions. They give their profits back to the market as they keep pushing the buttons and entering order after order.
Just like the gambler who overstays his welcome at the blackjack tables.
You don’t want to be a gambler. You want to be a smart business man/woman who has pre-calculated the risks and knows when to walk away each session.
What Variables Go Into Successful Crude Oil Trading
There are the elements that are required to succeed at crude oil futures trading
- Trade plan and rules
- Quality vs. quantity
- Smart risk and money management
- Discipline to execute the plan, each and every session
- Research and knowledge of what to expect from the trade plan – this is critical to success!
- Adequate capitalization
Don’t forget about the news releases.
Another important aspect to crude oil trading is the weekly Inventory Report that comes out every Wednesday or Thursdays on holiday shortened trade weeks. On Wednesday, it is released at 10:30 am.
If it is a holiday week, then expect its release on Thursday at 11:00.
Make sure to not try to execute new trades around this report.
We typically stop taking trades 5 minutes before the release. More conservative traders will even go flat and close out positions that happen to still be open prior to the report.
The problem with trying to execute trades through this report is that it will produce wild volatility and liquidity momentarily dries up at many price points. In other words, the price will hit your targets but you won’t get filled until some other unpredictable price level is reached.
In short, you lose control of your trade! That is never good!
While trading through the report is not the wisest thing to do, I like treating the after report trading as an entirely different trade session; almost like a 6th session each week, with its own start times and quitting goals. I like to begin looking for trades a fast 2 minutes after the release. I will typically trade for one good winner and then I’ll quit for the session. Some traders like to wait 5 minutes.
Crude Oil Trading Can Be Lucrative
Crude oil futures is one of the most dynamic and lucrative day trading markets there is. It is critical though that you do a lot of preliminary research before risking real money.
It is wise to back test your intended approach in a pre-programmed spreadsheet so that you can see what your chosen trade plan has produced in the past. Then continue testing it forward in real time, while practicing it in a simulation account.
You want to establish a positive expectancy (average net profit per trade) as well as a plan that wins on most sessions and has a strong weekly win rate as well. I use a spreadsheet called the UTA (Ultimate Trade Analyzer) to track all my live trades and to back test each and every market, method and trade plan prior to risking real money.
Any trader can learn how to trade crude oil futures. Just make sure you respect the risk and realize that you have to treat this as a very serious and professional endeavor.
Treat it like a business and approach it with the same due diligence that you would apply to any business opportunity. With opportunity comes risk so you have to manage the risk exposure with intention and eyes wide open.