Oil Swings - Going Up
Master Class: CFD Trading. Lesson 2
As we found out in a previous article (ForTrader.org 01(67) February 2011), there are assets that change more intensively than currencies. They can be traded individually, or you can form an investment portfolio. Now it's time to get to the bottom of it, how those CFDs workThis is a way to capitalize on changes in the value of goods, shares and stock indices. Let's consider the technology of working with CFDs on the example of a popular commodity - oil.
The last few years we have seen dizzying swings in the oil market. At the beginning of 2008, the price of Brent oil was around $90 per barrel. But by mid-summer prices had already soared to the level of $140. At the beginning of 2009 oil prices were already at the level of $45. After such ups and downs, the dynamics of oil prices in 2009 and 2010 may seem sluggish. But 2011 started very dynamically. The well-known events in the oil-bearing Middle East gave acceleration to oil prices.
Fig. 1. Dynamics of Brent crude oil prices.
In the first two months of 2011 alone, the price of oil rose from $95 to $115 per barrel. A legitimate question is: how to take advantage of such movements? Let's break down the contingent transaction:
- Step 1. A trader purchases 1 barrel of oil at $95.
- Step 2. After a while the trader sells 1 barrel of oil at $115.
- Outcome of the operation - $20 profit on every barrel. Where is the actual oil?
The peculiarity of CFDs is that they do not treat the good or asset as the result of a transaction. Transactions are aimed at profiting from price changes. Traders are not interested in the goods themselves. Only the difference in price is of interest. CFDs allow you to get this price difference without actually buying or selling oil.
The important thing about working with CFDs is which the volume of transaction in kind is implied within one contract. For example, in FOREX CLUB one CFD on oil has a volume of 100 barrels. Therefore, our conditional transaction acquires the following content:
- Step 1. A trader purchases 1 oil contract (100 barrels) at $95.
- Step 2. After a while, the trader closes the trade by selling 1 oil contract (100 barrels) at $115.
- Bottom line - $2,000 profit - rate change of $20 x 100 barrels.
As can be seen from the history of oil price fluctuations, this commodity not only increases in price, but also regularly experiences severe drops. Consequently, CFDs can be useful here as well. For the sake of interest let's calculate the result from a hypothetical deal on the oil price drop in 2008:
- Step 1. A trader sells 1 oil contract (100 barrels) at $140.
- Step 2. After a while, the trader closes the trade by buying 1 oil contract (100 barrels) at $45.
- Bottom line - $9,500 profit ($95 rate change x 100 barrels).
It is natural that a bigger price change generates a bigger profit. This is why medium- and long-term work in the expectation of a strong price is very popular trend. At the same time, such contracts can be successfully used for short-term operations. Of course, price changes within a day are not so large, but due to the higher frequency of operations (higher turnover) the potential for short-term operations is also high.
And, as in any other type of business, the more money invested in the transaction, the more CFDs can be bought. And this has a direct impact on the profit from the transaction. We will talk about how much money is needed to work with CFDs together with FOREX CLUB in our next article.