How to Start Day Trading Crude Oil

how to start day trading crude oil
How to start day trading crude oil via the stock or futures exchange. Bariscan Celik, Getty Images

The price of crude oil fluctuates each moment as it is publicly traded on an exchange. The price of crude is not only determined by global supply and demand and the fundamental outlook for the physical commodity, but also the outlook and supply of demand from traders. A day traders job is not to assess the "real" value of crude oil. Instead, day traders profit from daily fluctuations in the price of crude, attempting to make money whether it rises, falls or its value stays nearly the same.

How to Day Trade Crude Oil - Futures Markets

Day trading crude oil is speculating on its short-term price movements. Physical crude oil isn't handled or taken possession of, rather all the trading transactions take place electronically and only profits or losses are reflected in the trading account.

There are a number of ways to day trade crude oil. The main way is through a futures contract. A futures contract is an agreement to buy or sell something--like crude oil, gold, or wheat--at a future date. Day traders close out all contracts (trades) each day and make a profit or loss on each trade based on the difference between the price they bought the contract and the price they sold it.

Crude oil futures trade through the Chicago Mercantile Exchange (CME Group). There are several types of crude oil, and contracts, which can be traded. There is a (Light Sweet) Crude Oil Futures Contract (CL) which represents 1,000 barrels of oil, and an E-Mini Crude Oil Futures Contract (QM), which represents 500 barrels of oil.

On the futures exchange, the price of oil fluctuates in $0.01 increments on the standard contract and $0.025 increments on the E-mini contract. This increment is called a "tick"--it's the smallest movement a futures contract can make. If you buy or sell a futures contract, how many ticks the price moves away from your entry price determines your profit or loss.

To calculate your profit or loss (your trading platform shows you, but it is good to understand how it works) you'll first need to know the tick value of the contract you're trading.

  • For a standard crude oil contract (CL) the tick value is $10. This is because the contract represents 1,000 barrels of oil, and 1,000 barrels multiplied by the $0.01 tick size results in $10. That means for each contract, a one tick movement will result in a profit or loss of $10. If it moves 10 ticks, you win or lose $100. If it moves 10 ticks and you're holding 3 contracts, your profit or loss is $300. Note that crude oil can move several dollars a day (hundreds of ticks), resulting in massive profits or losses on a single day trade.
  • For an E-Mini crude oil contract (QM) the tick value is $12.50. This is because the contract represents 500 barrels of crude oil, and 500 barrels multiplied by the $0.025 tick size results in $12.50. That means for each contract, a one tick movement will result in a profit or loss of $12.50. If it moves 10 ticks, you win or lose $125. If it moves 10 ticks and you are holding 3 contracts, your profit or loss is $375.

The tick value in QM is not the same as CL, so CL will be more volatile than QM.

For example, a $1 price move in crude is 100 ticks in CL, or a potential profit or loss or $1000 on one contract. A $1 move in QM is only 40 ticks ($1/$0.025), or a potential profit or loss of $500 on one contract.

The amount you need in your account to day trade a crude oil futures contract depends on your futures broker. NinjaTrader, for example, ​requires you have $1000 in your account to open a position for one Light Sweet Crude Oil contract. You also need enough in the account to accommodate for potential losses (need much more than $1000). See Minimum Capital Required to Start Day Trading Futures.

To day trade an E-Mini crude contract (QM), you need $500 in your account, plus additional funds to accommodate losses. The amount required by your broker to open a day trading position is called Intra-day margin; it varies by broker and is subject to change.

These figures assume you're day trading and closing out positions before the market closes each day. If you hold positions overnight, you are subject to Initial Margin and Maintenance Margin requirements, which will require you have more money in your account.

How to Day Trade Crude Oil - ETFs and/or Stock Market

Another way to day trade gold is through a fund which trades on a stock exchange, like the United States Oil Fund (USO) or the less popular S&P SGSCI Crude Oil Total Return Index ETN (OIL). If you have a stock trading account you can trade the price movements in crude oil.

The value of the ETF and ETN are reflective of daily percentage price changes in crude oil.

The products trade like stocks. The minimum price movement is $0.01, therefore you make or lose $0.01 for each share you own each time the price changes by a penny. Stocks and ETFs are typically traded in 100 share blocks (called lots) so if the price moves a penny and you're holding 100 shares, you make or lose $1. If the price moves $1, from $30 to $31, you make or lose $100 on your 100 share position. If you are holding 500 shares, you make or lose $500 on that same price move.

The amount you need in your account to day trade a crude oil ETF depends on the price of the ETF, your leverage and position size.

To day trade stocks or ETFs in the US you're required to have a $25,000 minimum balance in your account. Depending on how much income you want to generate and your leverage, you may wish to have more than $25,000 available to you. See Minimum Recommended Capital For Day Trading Stocks for guidance on how much capital you should start day trading ETFs and stocks with.

For day trading strategies see the Day Trading Strategies for Any Market and Trading Systems categories.