How to Start Day Trading Crude Oil

New York Stock Exchange, Wall St., New York, USA
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The price of crude oil fluctuates each moment as it is 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; it's also determined by the actions of traders.

A day trader's job is not to assess the "real" value of crude oil. Instead, a day trader profits from daily fluctuations in the price of crude, attempting to make money whether its value rises or falls.

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

Futures Markets

There are a couple of ways to day trade crude oil. The main way is through a futures contract, which is an agreement to buy or sell something—like crude oil, gold, or wheat—at a future date for a set price. Day traders, by definition, close out all contracts each day. They make a profit or loss on each trade based on the difference between the price at which they bought or sold the contract and the price at which they later sold or bought it to close out the trade.

Crude oil futures trade through CME Group's NYMEX exchange in New York and the International Petroleum Exchange in London. There are several types of crude oil—and associated contracts—that can be traded. The most commonly traded contracts are the West Texas Intermediate Crude Oil Futures Contract (CL), which represents 1,000 barrels of oil, and the E-mini Crude Oil Futures Contract (QM), which represents 500 barrels of oil.

On an exchange, the futures price fluctuates in $0.01 increments on the standard contract and $0.025 increments on the E-mini contract. This increment is called a tick, and it's the smallest price movement a futures contract can make. If you buy or sell a futures contract, the number of ticks the price moves away from your entry price determines your profit or loss. To calculate your profit or loss—your trading platform will do this for you, but it's good to understand how it works—you'll first need to know the tick value of the contract you're trading.

  • For the standard crude oil contract (CL), the tick value is $10. That's because the contract represents 1,000 barrels of oil, and 1,000 x $0.01 = $10. That means for each contract, a one-tick movement will result in a profit or loss of $10. If the price moves 10 ticks, you gain or lose $100. If it moves 10 ticks and you're trading three contracts, your profit or loss is $300. Note that crude oil can move hundreds of ticks a day, resulting in massive profits or losses in a single day of trading.
  • For an E-mini crude oil contract (QM), the tick value is $12.50. That's because the contract represents 500 barrels of crude oil, and 500 x $0.025 = $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 gain or lose $125. If it moves 10 ticks and you are holding three contracts, your profit or loss is $375.

    Minimum Futures Trading Amounts and Margin Costs

    The amount you need in your account to day trade a crude oil futures contract depends on your futures broker. Keep in mind that you will also need enough money in the account to accommodate for potential losses. The amount required by your broker to day trade on margin—with some of the money borrowed from your broker—varies by broker and is subject to change.

    If you don't close out all of your positions before the end of the trading day, you are subject to initial margin and maintenance margin requirements, which will necessitate still more money in your account.

    Crude ETFs

    Another way to day trade crude is through a fund that trades on a stock exchange, such as the United States Oil Fund (USO). If you have a stock trading account, you can trade the price movements in crude oil through such an exchange-traded fund (ETF). The value of the ETF reflects daily percentage price changes in crude.

    ETFs trade like stocks. The minimum price movement is $0.01, so you make or lose $0.01 for each share you own each time the price changes by a penny. ETFs (like stocks) 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.

    Minimum ETF Trading Amounts

    The amount you need in your account to day trade a crude oil ETF depends on the price of the ETF, your position size, and whether you're trading with leverage (using borrowed money). You will need at least $25,000 in your account if you're trading in the U.S., because that is the minimum amount required by law to day trade stocks or ETFs.

    Depending on how much income you want to generate and your use of leverage, you may wish to have significantly more than $25,000 available to you. At any rate, you should keep more than $25,000 in the account to cover potential losses that would make the account's value fall below that minimum amount.

    The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.