By definition, technical analysis is the study of current and historic price action. For West Texas Intermediate (WTI) and North Sea Brent (BRENT) crude oil futures technical analysis, traders frequently rely on technical indicators to address the consistently robust levels of participation.
Let’s take a look at three ways that technical analysis can be especially useful in the fast-paced crude oil marketplace.
1. It Addresses Robust Market Volatility
If you’ve ever delved into the WTI or BRENT crude oil futures markets, then you’re aware of exactly how volatile each product can be. WTI has a reputation for being the wild west of futures trading because the action is often chaotic with sudden swings in pricing.
To account for and capitalize on the volatility of these markets, traders apply various facets of crude oil futures technical analysis. Here are three of the most common:
Momentum oscillators, such as stochastics or the Relative Strength Index, indicate when a volatile market is becoming overbought or oversold. The user may be able to implement any number of trend exhaustion or reversal strategies.
Bollinger Bands place periodic price action between an upper and lower band, an area commonly referred to as the “envelope.” The wider the envelope, the greater the volatility; the more narrow the envelope, the lower the pricing volatility. Bollinger Bands are great for identifying trending or rotating conditions in the oil markets.
Average True Range (ATR)
Average true range (ATR) is an indicator that is used to quantify periodic trading ranges. Simply put, the higher the ATR, the greater the volatility. This tool is especially applicable to the crude oil markets because it helps to establish potential trading ranges and volatility expectations.
Each of the indicators above may be used to directly measure volatility. With identified overbought/oversold levels, a graphic representation of price elasticity, or a true range projection, one can place evolving price action into a manageable context. By doing so, they can more easily execute reversal, trend following, or breakout strategies.
2. It Builds a Statistically Verifiable Track Record
One of the biggest challenges for active traders is being consistent. This task is particularly cumbersome in the fast-moving, dynamic crude oil markets. To establish a reliable framework for crafting trading decisions, crude oil futures technical analysis is a go-to methodology for many active energy traders.
The mechanical nature of technical trading is ideal for generating a statistically verifiable track record. Trade setups are identified via the application of individual technical strategies, so there is no guesswork when interpreting the market. An indicator or tool either provides a trading signal or it doesn’t―there is no ambiguity. In this way, trading results may be viewed as a homogeneous sample set and performance evaluated over time.
Conversely, discretionary (decision-based) traders are prone to struggle with consistent decision-making. Many variables can influence the decision to place a trade or pass, making it difficult to isolate the true drivers of profit and loss. Unfortunately, this judgmental nature makes it extremely hard to create apples-to-apples comparisons and garner statistically valuable long-term results.
If you’re interested in building a crude oil trading system or evaluating a distinct methodology, technical analysis is a reliable tool for completing these tasks.
3. It Promotes Consistency
When it comes to markets that are as active as the global crude oil complex, trading with consistency is vital to success. Crude oil futures technical analysis can help you do just that for these reasons:
- This kind of technical analysis reduces the negative impacts of human emotion, overtrading, and chasing losses.
- Trading signals are cut and dry―a trade is either warranted or it’s not.
- Technicals function well in defining market entry and exit points before or during a trade’s execution.
By managing crude oil volatility and building a verifiable statistical track record, technical analysis promotes consistency in the live markets. If you’re struggling to stay consistent, integrating one or more technical tools is a great way of structuring buying and selling over the long run.
For more information on crude oil futures, check out CME Group’s free e-book Introduction to Crude Oil Futures. In it, you’ll find invaluable tips for capitalizing on the opportunities local to the world’s oil markets.