Crude oil is indeed a volatile instrument which can show striking movements within short periods of time. While volatile instruments can at times be dangerous, if you are aware of what you are doing and can understand crude oil trading signals, you have a chance to make a lot of money with it.
1. Crude Oil Lot Size
In crude oil trade, a minimum trade size is typically a 10-barrel contract. But some brokers offer a 1-barrel contract as well. However, this doesn’t occur very commonly.
A 10-barrel crude oil position would cost $500 to open, at a price of $50 a barrel, if you have no access to leverage.
Some brokers provide 1:500 leverage on crude, the meaning of which is that just one dollar of your equity is engaged in opening a 10-barrel position.
However, the right crude oil trading strategy is to have extra equity to maintain the position once you open the oil trade since any floating loss should be supported by free (available) margin. Right after you’ve opened a crude oil trading position, a floating loss will occur at around 5 pips, which is the spread.
1 barrel of oil is 42 gallons (i.e. around 159 liters).
2. Pip Value
Most trading platforms think of a crude oil pip to be $0.01. The meaning of this is that a $1 change in the oil price is equal to 100 pips.
Let’s take an example of a 10-barrel contract. 10 barrels’ x $0.01 = $0.10. This is the pip value for trading accounts shown in US dollar.
This pip value remains always the same since crude oil and US dollar are paired up and the dollar is the ‘quote currency’ in the ‘pair’.
3. Calculation of Profit and Loss
You can understand calculating profits made on crude oil trading signals from a simple example. The fastest way to calculate your profit is multiplying the number of barrels you purchased by the difference between the price at which you entered and your take profit.
Thus, if you purchased 140 crude oil barrels at $50 and your take profit is $53.75,
$53.75 – $50.00 = a profit of $3.75. Multiply this by 140 barrels and your profit is $525.
4. Instruments Interrelated to Crude Oil
The prices of oil considerably affect the currencies of certain countries that largely depend on oil production and exports. A good example of this is Canada which exports most of its petroleum to the US. So, the Canadian dollar is normally highly correlated to the traded oil price. An abrupt rise or fall in the oil price can be easily seen in the USD/CAD exchange rate and also in rates of other pairs with Canadian dollars.
You should remember these basic crude oil trading tips so that you can succeed in the trade.