The Role of Technical Analysis in Crude Oil Trading

When mentioning trading, the name of crude oil instantly pops into our heads, but why? Crude oil is one of the highly traded commodities. This market is so diverse that you’ll likely find an oil trader at every nook and cranny.

In any asset class, the primary aim for a trader is to make their trades as profitable as possible. For this, we’ve got two cutting-edge analysers, namely fundamental analysis and technical analysis. Traders opt for these analyses to ensure their buying, selling, and holding decisions.

Unlike fundamental analysis, traders utilize technical analysis as it’s suitable for short-term market judgment. Let’s see howoil trading companies in Singaporemake use of it.

How Does Technical Analysis For Crude Oil Work?

Technical analysis plays a significant role in crude oil trading. Those having an outstanding knowledge of energy markets can surely trade profitably. It involves everything from analysing charts and data to identifying patterns and market trends. With these patterns, traders will likely decide when to buy or sell crude oil. Ultimately, they’re maximising their profits.

By using past price patterns, the tool predicts the future market conditions of crude oil. We’ve brought you some obvious elements of technical analysis and servicing oil trading.

  • Supply and Demand

Supply and demand is the primary factor in predicting the long-term success of a commodity. As much of a product is demanded by the users, the more will be the progression.

Just like stocks of companies are priced on their strong fundamentals, so does crude oil. The product is priced as per the market’s supply and demand ratio.

You may know that a supply higher than demand forces the quotations to fall, and a supply lesser than the demand causes the price to rise. Likewise, higher global demand has made oil a pivotal price-deciding factor.

  • Futures Market Conditions

When a buyer and seller steps into the oil futures contract, they’re the one to determine the future purchased price of the oil. A futures contract is legal, and multiple manufacturers rely on it to diminish their losses due to price fluctuations.

For instance, the airline industry houses futures contracts to avoid high fuel prices due to market vulnerability. In addition, there are speculators in the market betting on the price movement of crude oil. They manipulate the oil futures contract, believing the demand may increase.

Eventually, the rising demand will pose an increment in the prices. However, such predictions largely depend on technical analysis and market psychology.

  • Momentum Indicator

Momentum helps identify trends, and it’s quite a useful technique for predicting the price movements of commodities. For crude oil, the momentum would be “buy low and sell high”.

While the first step is specifying the market, one must apply the trends charts in technical analysis. By this, the buy and sell signal can be determined.

Ideally, a stochastic indicator is one of the most popular indicators for crude oil. It helps you observe if the prices are upward during the day.

  • Moving Average

The moving average indicator in technical analysis for crude oil smoothens the random price movement. It determines the average price of a commodity over a specific period.

As a result, it’s a great chance to identify a trading opportunity. As the data is based on past prices, moving averages anticipates the current price trend. Yet, they can be aligned with other complementary tools.

  • Commodity Price Cycle

The commodity price cycle occurs when crude oil prices experience a repetitive rise and fall pattern. Factors like demand and supply, geopolitical events and economic indicators impact this cycle.

During the expansion phase, the need for commodities increases, leading to a price rise. As prices increase, manufacturers boost production to meet the demand. Eventually, it led to an oversupply, followed by a price decline.

This decline takes you to a contraction phase, where prices keep falling to a point where supply and demand balance. The cycle then repeats itself. In a nutshell, perceiving how this point works is vital for traders to make informed decisions.

Final Thoughts!

The trading world is more expensive than you think, let alone for the highly in-demand crude oil. When dealing with oil, traders must be extra conscious and make well-informed decisions. They can’t just go with the flow and hope for the best. Similarly, this guide on technical analysis will help you predict the crude oil price movement.

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