Crude oil technical analysis can be simply explained as using technical indicators to assess the move in crude prices and then trading based on the trend that appears. Crude is undeniably one of the most volatile commodities and trades 24×7 across geographies. Given the recent downswing in the prices, trading interest has gone up significantly in this commodity.
Essentially, the technical analysis takes stock of the real-time rates for a specific period. These are generally separated into segments like ‘Moving Averages’, ‘Oscillators’ using associated data like the volatility index reading. A key advantage of technical analysis is the ability to create pit stops that are called stop losses or profit booking points. This can help you take a closer look at your investment at key price points and re-calibrate the overall investment trend.
Therefore, it is quite clear that you can use a variety of technical indicators but you must also remember that this is a rather advanced form of trading and requires in-depth sector knowledge for absolute gains. So, it becomes rather important to factor in the various parameters for a precise and accurate technical analysis of crude oil.
Also Read: A Simple Crude Oil Trading Strategy
How does the oil technical analysis differ from fundamental study?
This is essentially the basic point of difference and cardinal factors in grasping the basics of oil technical analysis. While fundamental analysis of the oil prices is dependent on supply-demand metrics and future expectations, the technical analysis takes the previous price and volume movement to predict a future trend and price levels.
While most successful traders use a combination of fundamental and technical indicators to formulate their trading plan, interpreting and cracking technical ones are relatively more difficult.
Essentially, these indicators help the trader gauge the movement and the possible trend that the commodity will follow. Based on these, one creates unique patterns and generates the buy-sell signal in the market. It also helps traders gauge the relative risk factors in the market, and whether one can proceed with specific trade in the given market conditions.
So, you can say while fundamental analysis forms the core of any in-depth commodity research report, technical analysis is a crucial ladder that helps you extract a little extra from every trade. It is instrumental in helping investors generate more meaningful value from every dollar that they invest in the market over the longer term.
Same signals, different charts
One of the most important aspects of learning to interpret crude oil technical analysis is that the signals are generated based on a variety of different time-frames. So you will have a monthly, yearly or daily chart using the same signals, but indicating different trading thresholds based on the time frame that you choose. These varying patterns and time-frames help you get a deeper grasp of the market movement and identify the core trend.
This trend is often the key to technical analysis of the oil future. It helps outline the trading plan and the frequency of executing trade too.
Indeed technical trading is precision-based, and the accuracy of the time frame and price point is crucial there. This is because the trend forecast is based on every single move and the depth of that move. In essence, this is the cardinal factor that helps introduce accuracy and dependability to these technical parameters.
The most interesting factor in this context is that the key constituents of these varying indicators are often the same. The time-frame is often the one that is different and that in itself becomes the fundamental trend determinant.
How to trade profitably?
When you get into crude oil technical analysis, profitability is often the core objective. But the question is how do you guarantee that? This is particularly tricky for crude oil because these markets are trading 24×7. Often sharp trends in the crude market attract retail attention but you have to be very careful about handling fear in the market and stay away from the herd mentality. Often the greed-fear momentum waves overwhelm the underlying trend and this can result in severe losses.
As a result, there are chances of historic collapses or exceptionally high volume trade. If you want to retain your profit from crude oil technical analysis, you need to be adequately wary of these pitfalls. When fear and greed take over the market, it only results in losses. Therefore you have to carefully identify the core trend and make it your friend to lock in profits significantly over an extended period.
Nymex crude and Brent crude
Often this is a dilemma for most novices dabbling with oil technical analysis. Remember that crude oil trades in two basic markets. The Nymex crude futures trade on the New York Mercantile Exchange, and the prices, in this case, track the West Texas Intermediate crude prices.
The Brent crude prices, on the other hand, are derived from over a dozen fields spread across the North Atlantic region. Over a point of time, Brent has come to be regarded as a better indicator of crude prices globally. So, any technical analysis needs to factor in the difference of this pricing carefully.
Carefully assess the long-term price history
This is another key factor to lock your profit while mastering technical analysis of oil is the ability to read long-term charts. Let’s face it; apart from day traders, it is hard to take a daily or hourly call on the crude futures. In this context, most oil technical indicators will call for the need to study these long-term price trends in detail. Often that also helps identify the broad market trend and comprehensively predict future price movement.
Therefore, you must remember that any basic oil technical analysis requires in-depth market understanding. Consistent profits need careful consideration. You have to understand what moves the market and anticipate the crowd movement. That often holds the key to getting the best possible gains.
The technical analysis of crude oil is therefore dependent on a variety of factors like crowd reaction, derivatives movement, and volume –price action ratio and takes a balanced call based on all the factors.