Oil Trading Binary Options Strategy

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Binary Trading Strategy for Oil

Trading Oil on Binary Options Platforms

This article is sponsored by OptionBit which is our recommended broker for trading oil with binary options.

It is true that this is a binary options trading blog, but the truth is that the principles we shall talk about cover all assets traded in the binary options market. So we will select an instrument that is traded on the binary options platforms of many brokers to illustrate a typical trade strategy, and that asset is crude oil.

Many traders are familiar with trading currencies, but very few trade crude oil. As such, they are in a position where they are leaving a lot of money on the table. This is supported by the fact that the same technical analysis principles used in forex analysis are virtually the same principles used in technical analysis of any other instrument. What is good for the goose definitely has to be good for the gander as well.

Let us examin a binary options trading strategy that will employ the use of the Fibonacci retracement tool, this time not as a strict retracement tool but as a tool that can be used for range trading.

Look at this daily chart for crude oil (CLJ1). This was the chart occurring at the time when the Libyan civil war was raging and crude oil prices had really taken off from $84 to slightly above $100 a barrel.

This kind of trade is a dicey one, because the fundamentals that were pushing crude prices were ones that could not be predicted. This was a war situation. Any shift in the dynamics of the war would immediately cause a shift in the behaviour of the underlying asset. This was what was playing out here.

Prices were rising as no one knew how long the war would last. As battles for the Libyan cities raged and towns were taken, lost and re-taken by the opposing fighters, prices were doing a dance.

In this sort of scenario, it is extremely important to pay attention not just to the fundamentals, but to the technicals as well. You may have heard the saying: trigger fundamentally, enter technically. What this saying means is that the triggers for direction are the fundamentals (the news), while technical plays enable the trader to make the correct entry in the direction of the fundamental trigger.

As it became obvious that the war was going to last for sometime as talks and mediatory efforts broke down, traders settled in for a long ride upwards. But this is where the technicals came to play.

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Scenario 1

In the chart below, we see a double bottom forming at the commencement of the civil war, giving crude a bullish jumpstart. Combining the news and the double bottom formation, a discerning trader would know that the only way crude oil was going was northwards. This sets up the following binary option plays:

1) Touch option with an upside barrier above the neckline level of $92.40.

2) No Touch option with a downside barrier below the double bottoms at $84.80.

3) “High” trade (or “Rise” on Betonmarkets), betting on prices staying above the neckline of 92.40.

4) “Out” boundary trade using the price barriers of the neckline as upper barrier, and the double bottoms as lower boundary.

This trade outcome would have netted the trader at least 400% returns with a one-week expiry.

Scenario 2

For those who missed the play on scenario 1, the next play would be to wait for the retracement that would surely occur as traders took profits. Plotting the Fibonacci retracement tool from the swing low to swing high, we see this at the 39.2% retracement line, somewhere at 97.40. Of the two green circles, the second one is the most significant. This is because the first indicates the point of maximum retracement, which forms a key support. It tells the trader that any other retracements would probably test that support level as well. This sets up the following trades:

1) Touch trade, setting the 39.2% retracement line (or more ideally a point between 10 and 20 pips above it) as the strike price.

2) No Touch trade at a point 10 pips below the 50% retracement line (valid only if the 39.2% retracement support is a strong one).

The other binary trade types would be too risky to trade in this situation so we leave them out.

Hope this short strategy lesson is well understood. We used this for crude. You can use it for any asset in the binary options market.

Trading Crude Oil

You will learn about the following concepts

  • Introduction to crude oil trading
  • Supply and demand
  • Pricing factors

Introduction

The last commodity we will talk about is crude oil. This is one of the top three most traded assets in the binary options market, so we strongly advise you to get familiar with all the details about crude oil because it will surely continue to be an important part of binary options trading.

Crude oils popularity in trading stems from its fundamental role in modern life. As a commodity used to produce energy resources to power modern transportation vehicles, crude oil has become irreplaceable, or at least in the near future. It was only in the dawn of the 21st century when alternative-powered vehicles using electricity and hydrogen were developed, with the former making their first steps into the mass market just now, while the latter still have a long way to go.

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Fluctuations in the raw materials price have a broad effect on prices of goods and services, due to the changes of transportation costs, which in terms affects economic activity. Moreover, price changes affect major producing countries as well, given crude oils large share in their exports sheet. One of the brightest examples is Canada, which is one of the few highly developed economies that is a net exporter of energy, and especially crude oil. This, of course, implies a strong correlation between crude oil prices and the Canadian dollar. To learn more about the Canadian economy and its ties to commodity exports, read our article “Profile of the Canadian Dollar – Economic Overview and Monetary Policy” and its follow-up.

The common fractions of crude oil as fuels are: petrol, diesel, kerosene, jet fuel, fuel oil, liquefied petroleum gas and butane.

However, fuels are not the only byproducts of crude oil. The raw material is used for the production of alkenes, which can be manufactured into plastics or other compounds, lubricants, asphalt, wax, paraffin wax and others.

Crude oil pricing factors

Crude oil holds a fairly stable value due to the overall constant rate of global production and demand. However swift and wide fluctuations can also be observed, especially during times of geopolitcal tensions at, or near major oil producers. The best way to approach crude oil binary option trading is to rely on fundamental analysis and use technical analysis to determine the best entry and exit points for your trade. Here are some of the main factors you should be on the lookout for:

  • Weekly US crude oil inventories report, due at 14:30 GMT on Wednesday
  • Monthly IEA and EIA oil market reports
  • OPEC, Russia and North Sea production
  • Natural disasters that may affect crucial infrastructure, especially in the Gulf of Mexico and the North Sea
  • Geopolitical turmoil at or near major oil producers, especially in the Middle East
  • Economic data from major oil consumers which may point to an acceleration or deceleration in economic activity, and thus in oil demand, especially in the US, China and Europe

The inventories report is the first data checked by investors when they plan to bet on crude oil binaries. These reports are released by the US Department of Energy every week on Wednesday and show how many barrels of crude oil are held by US firms, excluding the Strategical Petroleum Reserve which is maintained by the US Department of Energy. Because the US crude oil inventories report reflects changes in the supply-demand balance, the report often causes prices to fluctuate. However, because the government report is not the only factor affecting oils pricing, your analysis cannot be based solely on the EIA statistics, which means you need to combine the information received from the report with other data to make an accurate prediction.

Weather and disasters

Weather reports can turn into one of the most important factors that affect the price of crude oil. For example, if weather agencies predict a long and cold winter, then it is very likely that there will be higher demand for heating fuels. Also, extremely cold weather typically causes vehicles engines to use up more fuel, driving additional demand.

Natural disasters such as hurricanes will also affect oils price. Oil platforms located along the US Gulf coast are often hit by hurricanes which significantly reduce their operation capacity by forcing staff evacuations. This in terms cuts supply output and causes a jump in prices.

Seasonality is also a factor as refineries are typically shut for maintenance to switch to the production of summer- or winter-grade fuels ahead of the respective season.

Economic data, unrest

As logic dictates, major economic data and macroeconomic events also affect oils pricing since a contracting global economy will spur less fuel demand as opposed to booming growth. Thus, during times of recession, oil is typically trading at lower prices, in case there are no threats on the supply side. Conversely, economic expansion implies higher demand for oil, and thus higher prices. Oil traders focus is primarily shifted toward data from the United States, China and the European Union (as a single entity), the worlds top three consumers.

And last but not least, geopolitical turmoil at or near major oil producers tends to have an immediate and strong effect on oil prices, especially when it comes to members of the Organization of the Petroleum Exporting Countries and neighboring nations, as well as Russia – the worlds top energy exporter.

Trading Oil With Binary Options: A Primer

Most binary options traders fall into one of two camps when it comes to trading oil contracts. The first camp is made up of folks who are hesitant to dip their toes in the water. Some of them realize they lack the expertise of professional traders, and thus are likely to make costly mistakes. Other folks in this camp are intimidated by the volatile nature of crude oil prices. They watch the prices move up and down and don’t understand the factors behind them. So, they sit on the sidelines.

The second camp is filled with folks who are very comfortable trading oil binary options. They either have a lot of experience with the asset, or have educated themselves on how to trade it profitably. The traders who develop their own trading strategies and stick to them are usually the ones who generate the best returns over time. Developing your own trading strategy sound enticing? Learn more here

Although there seems to be an enormous gap separating the two camps, they’re closer than you might think, especially if you’re in the first camp. The fact is, with a little education and a bit of experience under your belt, you can learn to trade this asset profitably. We’ll get you up to speed on trading oil binary options below.

Basics Of Trading Oil With Binary Options

As you know, binary options are contracts on the prices of underlying assets, such as stocks, gold, or oil. There are only two possible outcomes for each contract. Depending on the type of binary option, the asset’s price will either:

– move up or down

– stay within a certain range or move outside it

– hit a certain price level or fail to do so

The trader must predict which outcome will occur. Each binary option has a predefined rate of return the trader will receive if the contract expires in the money. If it expires out of the money, the trader’s investment is lost. There’s no ambiguity about the magnitude of the return or loss. Everything is known upfront. That’s one of the benefits of trading binary options.

(If any of this sounds unfamiliar to you, we highly recommend that you check out our “Basics of Binary Options” guide.)

Now, consider oil (crude oil, specifically). It’s like any other commodity, such as gold or sugar. It is a physical asset to which a price is attached. And like other commodities, it is traded vigorously throughout the day with several factors buffeting its price.

If you’re a professional trader moving huge sums of money through a complex portfolio of oil futures contracts, then yes… it pays to know exactly what you’re doing. But trading oil with binary options is much simpler. Not only can you get started with very little capital – you can trade as little as $20 – but you’ll know in advance how much you stand to win or lose. It’s a matter of selecting oil as the asset, choosing an expiration for the trade, and predicting an outcome. Once you’ve executed the trade, you’ll know within minutes whether you’ve won or lost.

Now that you know how easy it is to trade oil binary options, let’s talk about the factors that influence crude oil prices.

What Factors Influence The Price Of Crude Oil?

We’ll start with supply and demand. The supply of oil is driven by two groups of producers: countries that are part of OPEC (Organization of the Petroleum Exporting Countries) and countries that are not. The former group controls approximately 40 percent of the supply and actively changes production according to demand. The latter group controls 60 percent of the supply and usually works at full capacity. As a general rule, the higher the production, the lower the price of crude.

Demand is also driven by two groups: countries that are part of OECD (Organization of Economic Cooperation and Development) and those that are not. The former group consumes approximately 53 percent of the world’s supply. The latter group consumes the rest. Greater demand tends to push prices higher, and the growth in demand from a country is usually a result of economic growth.

Another factor that affects crude oil prices – both current prices and future prices – is inventory. Think of inventory as the amount of oil on hand to satisfy demand (that’s a gross oversimplification, but will suffice). If inventories dwindle and the market signals an increase in future consumption, you can expect the price of crude to rise. The opposite scenario – large inventories and dwindling future demand – leads to a price decline.

Trading activity in the oil futures market also influences crude oil prices. This activity is driven by numerous participants. For example, hedge funds trade futures to hedge their bets and leverage long returns; airlines trade futures to normalize the price they’ll pay for fuel down the road; oil producers trade futures to nail down future prices in the present.

So, where can you get your hands on all these data? The best place to get them is on the U.S. Energy Information (EIA) website at http://www.eia.gov/finance/markets/. Some of it is updated monthly, and some of it is updated quarterly.

Going through the EIA data is no picnic. It takes time and patience. While getting acquainted with the numbers, it’s a good idea to learn how to identify support and resistance levels in oil prices.

Support And Resistance Levels In Oil Prices

Support and resistance levels signal potential break out points for asset prices. If you trade binary options, you should know how to identify these levels on the price charts for the underlying assets. It doesn’t matter if you’re into contracts on crude oil, the DJIA, or Facebook stock.

A support level is the price below which an asset is unlikely to fall. It can signal an opportune time to buy a call binary option on the underlying asset. For example, suppose the price of crude oil has fallen from a recent high and approached its first support level. Savvy traders may buy call binary options under the assumption that the price of oil will turn around and begin to climb.

A resistance level works in the opposite manner. It is the price above which an asset is unlikely to rise. Here, if the price of crude has risen sharply from a recent low and approached its first resistance level, an experienced trader might purchase put binary options.

There are a lot of different strategies binary options traders use involving support and resistance levels. Some work better than others, and some work better for select assets. The important thing is to develop a reliable strategy that performs consistently well when you trade oil contracts. Keep testing it to validate its effectiveness. Then, stick to it stubbornly.

Where To Start Trading Oil Binary Options

To repeat, the above is merely a primer. It’s to help you become more comfortable with the idea of trading oil contracts using binary options. There’s clearly no way to cover every aspect of this topic on a single page and expect to do it justice. We’ll return to it with examples and strategies for making profitable trades in the near future.

For now, we recommend taking 3 steps:

Step 1: If you haven’t already done so, register accounts at 24Option and TradeRush.

Step 2: Read our tutorials on price action and candlestick chart patterns. It’s also a good idea to check out our guide on bankroll management.

Step 3: Place a few trades on oil binary options. There is no better teacher than experience. You can read for weeks and still feel unprepared. Placing three or four trades will give you confidence and a feel for the oil market. Consider any profit you make on in the money trades to be a bonus. https://www.bestfxbrokers.com/binary-trading/guide/gold-oil/ will help you start your trades

Remember, it’s easy to get started with binary options. You don’t need a master’s degree in options trading to do well. The key is being able to perform basic analysis – we’ll teach you how on this site – and taking action. The good news is, you’re in control of both.

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