👉 How to Develop a Crude Oil Futures Trading Strategy

⇒ Warning. Any strategy does not guarantee profit on every trade. Strategy is an algorithm of actions. Any algorithm is a systematic work. Success in trading is to adhere to systematic work.

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Understanding the standardization of contracts used in crude oil futures markets is fundamental to planning a trading strategy. Let’s explain the basics using an example.

In the instrument manager, go to the category US and EU futures / Energy Products to open the price chart for crude oil futures traded on NYMEX:

CL – standard futures contract for Light Sweet Crude; QM – E-mini contract; MCL – Micro WTI contract.

To open the Brent crude oil futures chart on the MOEX exchange, select: Russian market / Futures / BR.

You will be offered both Continuous contracts (e.g., CL) and those with a fixed expiration date (e.g., CLX7).

Let’s consider the differences between them using screenshots from the broker AMP Futures website. Below are the futures contract specifications.

The difference lies in:

the contract size: for example, 1 standard CL contract represents 1,000 barrels, while the micro contract is 10 times smaller;
the tick value: in 1 standard CL contract, a price change of 1 tick results in a contract price change of $10, while in the micro contract it is 10 times smaller.

More important information for planning your crude oil futures trading can be found on the page with margin requirements (Futures Margin Calculator List).

As seen from the table above, to trade crude oil futures:

with overnight positions: for a standard CL contract, you need to have at least $6,600 in your account; for a micro MCL contract, 100 times less;
intraday: for a standard CL contract, you need to have at least $1,625 in your account; for a micro MCL contract, only $165.
Of course, the broker has the right to change the terms of service, and the current requirements should be verified when necessary. However, the information on the specifications pages allows you to assess how capital-intensive crude oil futures trading is.

In fact, if a trader has a few hundred dollars available, they can already try trading micro-futures, which have minimal requirements for intraday crude oil trading. Moreover, if the trader has access to futures on stock indices under the brokerage service conditions, they are likely to have access to crude oil futures as well.

CRUDE OIL FUTURES – STRATEGY

By carefully studying the history on the chart, analyzing the interaction of price with major levels on the profile, and using their unique market perspective, an analyst and trader can identify the foundations for developing a crude oil futures trading strategy – for example, one based on rebounds. What is its essence? Let’s outline it.

Let’s open a 5-minute chart of the micro crude oil futures MCL, data from the NYMEX exchange:

A Market Profile & TPO indicator has been added to the chart.

The chart covers events over 4 days.

On the first day, a high-volume zone was formed (between $79.10 and $79.20 per contract) as a result of a temporary balance between supply and demand – marked with the number 1.

Then, influenced by some factors, the price dropped down (2) – sellers disrupted the balance with their activity.

However, the next day, buyers were able to recover the previous day’s decline – and the price rose to the high-volume zone (1), surpassing the $79 mark per futures contract. This could serve as a reason to look for confirmations, expecting the price to reverse down from the boundary of the high-volume zone.

To search for confirmations, you can use the Magnifier function. Press the letter M and hover the mouse to see (4) details of price and volume behavior when the price exceeds the important $79 level per crude oil futures contract.

In the opened window, it can be seen that despite purchases of 61 contracts, the price began to fall. The inability of the price to rise in the presence of buying activity is a bearish sign. It is possible that a large player is opening short positions with limit sales, or the influence of yesterday’s level, around which many transactions were made the previous day, is being felt.

Suppose the trader saw these signals and decided to open a short position. How much could they have earned?

Let’s assume:

short entry price = $79.05
target price = $78.50
stop-loss price = $79.40

Then:

risk = 79.40 – 79.05 = 35 ticks. And 1 tick = $1. Therefore, the risk = $35.
potential profit = 79.05 – 78.50 = 55 ticks. Accordingly, the reward = $55.

Since the price dropped to the take-profit level, the calculation was correct.

Assume that at the time of opening the trade, the account balance was $500. Then the account increased by 11%, and the risk was approximately 7% (which, it should be noted, is extremely aggressive, as classical guidelines suggest risking no more than 2-3% of the capital in a single trade).

Crude Oil Futures Strategy – Another Example:

Let’s consider the same micro crude oil futures chart, but this time the strategy offers the opportunity to trade a long position.

On the first day, a high-volume zone was formed (between $83.00 and $82.80 per contract) as a result of a temporary balance between supply and demand – marked with the number 1.

Then, influenced by certain factors (likely due to a news release, as the volatility spike was very aggressive), the price went up (2) to form a new balance at a higher level the next day.

However, on the third day, the price dropped (3) to the high-volume zone of the first day around $83 per futures contract. This provided an opportunity to consider opening a long position.

The Magnifier allows us to see (4) the details of price and volume behavior:

The pressure from sellers is weakening, as a large cluster with 52 sold contracts was followed by a large cluster with half the volume of market sales;
Each time the price rises after a cluster of large sales – a bullish sign. It is possible that a large player is opening long positions with limit sales, or the influence of the zone between $83.00 and $82.80, where many transactions were made the day before, is being felt.

Suppose the trader saw these signals and decided to open a long position. We leave the question of stop-loss and take-profit levels to the trader’s personal responsibility, but we draw attention to an important point.

If the take-profit is set at the level (7) of the previous day’s Point of Control (POC), it is precisely there (around $83.90):

The day’s high was formed;
A setup for entering a short position was created based on the crude oil futures trading strategy for a reversal from the high-volume level.

We can also note that during the trading session of the fourth day, the market provided an opportunity to consider entering a long position on the rebound from the level (8) of the first day’s high volume around $82.30… We won’t go into detail about this aspect right now.

How much do you need to start trading crude oil futures?

For intraday trading of micro-futures (MCL), you need to have about $165 in your brokerage account, as shown above (this depends on the specific broker). The margin requirements for trading crude oil futures on the Moscow Exchange are significantly lower; check with your broker and study the contract specifications.

What types of oil futures are there?

There are continuous contracts and those with a fixed expiration date. There are futures for Brent and WTI. There are delivery and cash-settled futures. Overall, these are popular financial instruments that help achieve various goals, including speculative intraday trading.

Which futures are the most liquid?

The crude oil futures with the nearest expiration date are usually the most liquid. However, just before the expiration date, traders “roll over” to the next expiration date futures to be able to hold a position for more than one day.

This trading simulator allows traders to recreate real trading conditions using historical data. To start: press Replay (1), apply the crude oil futures chart (2), press Play (3).

Applying a trading strategy for crude oil futures involves systematic daily work, which includes:

Monitoring the news agenda. An economic calendar (to the left of the Replay button on the chart above) can help with this.
Marking up the crude oil futures price chart on various time frames – daily, intraday (hourly, minute). Pay attention to psychological levels, high-volume levels, and other important support and resistance levels. Try not only classic time frames but also other types of charts, such as range bars.
Creating daily plans that include risk management.
Placing the necessary orders.

Tracking intraday price changes. Getting confirmations on lower time frames, for example, using the DOM Levels indicator.

Crude oil futures are a highly competitive market, and surviving will not be easy. Believing in a simple and quick way to high earnings is a misconception. First, make sure you have an edge to consider yourself ready to enter the battle of buyers and sellers.