Learn with ETMarkets: How to Trade Crude Oil Futures Using Moving Averages?

Crude oilBlack gold, also known as black gold, is mined and refined to produce a variety of useful products, including gasoline, jet fuel, and many other petroleum products. It is a critical raw material used in a variety of industries, including transportation, chemicals, and manufacturing.

West Texas Intermediate (WTI) and Brent crude oil These are the main types of crude oil traded on the international market. WTI comes mainly from the United States. It is a lighter and sweeter crude oil, meaning it has a lower density and lower sulfur content than Brent, making it easier and cheaper to refine into gasoline and other petroleum products than Brent oil.

OPEC In addition, it controls between 40 and 45% of the world’s crude oil production. This group is made up of 13 OPEC Members and 10 other allied oil-producing countries. They can influence oil prices and the oil market by reducing production or increasing supply. In India, crude oil is traded on different exchanges, but most volumes are traded on the New Delhi exchange. Indian Commodity Exchange Limited (MCX).

Timing the Commodity Market

At MCX, the market opens at 9:00 and closes around 23:30–23:55, taking into account the semi-annual daylight saving time. The international market is open 24 hours a day, 5 days a week, with a short break.

Factors affecting crude oil prices

Several factors can drive fluctuations in crude oil prices:Supply and demand:The prices of all commodities, including crude oil, are determined by supply and demand.Crude oil inventory dataCrude oil inventory data is released every Wednesday. Oversupply can put pressure on the price, while low inventories can cause a sudden spike in prices.

Geopolitical events:Conflicts or tensions in oil-producing regions can disrupt supply chains and affect prices. Recently, a Cold War-like situation between Iran and Israel has increased volatility and prices have risen by almost ten percent from their recent low.

Currency fluctuationsOil prices are generally expressed in US dollars. A strong dollar can make oil more expensive for countries that import it.

OPEC Decisions:As mentioned above, OPEC has a significant influence on oil prices. Its decision to increase or reduce production is closely followed around the world, which can affect crude oil prices.

Economic indicators:U.S. economic data, such as unemployment rates, manufacturing output and nonfarm payrolls data, can indicate the health of an economy, which in turn can affect consumption and oil prices.

Natural disasters:Events such as hurricanes, earthquakes and other natural disasters can disrupt oil production and supply chains, leading to fluctuations in crude oil prices.

Crude Oil Trading with Moving Averages:

Given the dynamic nature of the commodities market, which operates 24 hours a day, 5 days a week, the use of technical indicators such as moving averages (MA) can be effective when trading crude oil. There are different types of moving averages, but the most commonly used are:

• Simple Moving Average (SMA) – This is calculated by adding up prices over a specific period and dividing the total by the period. For example, a 20-day SMA is the average of closing prices over the past 20 days.

• Exponential Moving Average (EMA) – An exponential moving average (EMA) is a type of moving average (MA) that gives greater weight and importance to more recent data points. An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average (SMA), which applies equal weight to all observations in the period.

Business strategy

The EMA is useful for crude oil due to the fast pace of the market. An effective strategy is the technique of crossing over moving averages or crossing below them.

Application example:

We can experiment with different EMA combinations, but we have found the 20 and 60 EMAs to be ideal. This strategy can be applied on various time frames: daily, weekly or hourly. However, since this is a trading product, we recommend using it primarily on the hourly chart for optimal results.

In the chart above, I have applied two exponential moving averages (EMAs) – the 20-period EMA and the 60-period EMA – on an hourly time frame. The strategy here is simple: a sell signal is triggered when the 20-period EMA crosses below the 60-period EMA, and a buy signal is generated when the 20-period EMA crosses above the 60-period EMA. This approach effectively captures crude oil price movements, with clear directional changes after each crossover and crossover below.

This strategy is not limited to crude oil alone – it can be effectively applied to other commodities, stocks, and different time frames. We highly recommend rigorous backtesting and forward testing to hone and master this approach. Constant application and testing will allow for a deeper understanding of its effectiveness under different market conditions.

(The author is a commodity research analyst at Axis Securities)

(Disclaimer: The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of Economic Times)