Many traders and investors have faced a serious problem at some point – you identified the perfect trade, and now, you need to find the best financial instruments that enable you to execute this trade. Indeed, a serious problem. After all, financial markets are developed to some extent, but many assets are not yet available in every form.
For instance, crude oil is one of the most widely traded commodities in the world and is especially a favorite commodity for day traders. And yet, how do you short-sell crude oil? What about natural gas? Recently, the price of natural gas crashed amid warmer winter conditions.
What are the different ways to do that? How can you make a profit from falling prices of two of the most precious and needed commodities in the world? As someone who recently faced this issue, it’s not so easy for the average Joe trader to find ways to short-sell crude oil.
So, let’s talk about how you can start short-sell crude oil.
How can you short-sell crude oil and natural gas?
At basic, there are two ways to short-sell crude – through the traditional way via exchanges or a derivative market, that is, Contract for Difference (CFDs). Now, obviously, there are pros and cons for each way, and it all depends on the budget and your trading goals. If you are looking for a one-time trade, you better do it via exchanges by shorting futures contracts or options. For day trading with a low budget, you can certainly use CFDs, though it is a risky form of trading.
Short-sell crude oil and natural gas via exchanges
The first and most conventional way to short-sell crude oil is through exchanges, meaning crude oil futures contracts, options, ETFs, and oil stocks. The problem, you need to open a margin account which typically requires a lengthy registration process, and a high investment account, Moreover, in some ways, it is a less flexible method of trading.
In that aspect, trading futures contracts and options requires more effort and research than, let’s say, buying crude oil and natural gas CFD contracts. Oil stocks are not necessarily correlated to oil prices, and ETFs – do not even try. Many of these ETFs are manipulated by those institutions that issue them (like Pro Shares UltraShort ETFs).
Still, it is the favorite way of short-selling crude oil and natural gas. Remember that ETFs can be scammy in a way, and trading CFDs can be highly frustrating as you may guess the direction and still lose money due to high leverage and the trading conditions offered by some CFD brokers. That is why many conventional traders and investors prefer to short-sell oil-related assets via exchanges.
So, to short-sell crude oil or natural gas in the traditional method, you can follow these steps:
- Open a margin account with a brokerage that allows trading in futures contracts or options.
- Research the current market conditions and determine if crude oil/natural gas prices will likely fall.
- Sell crude oil or natural gas futures contracts or options at the current market price.
- Wait for the price of oil to fall.
- Buy back the same number of futures contracts or options to close out your position at a lower price.
- Profit from the price difference between the sale and the buyback.
Short-sell crude oil and natural gas via CFDs
The second way to short-sell crude oil is via CFDs, also known as contracts for difference. If you are familiar with CFDs, then you likely know the pros and cons of this form of trading. If not, we suggest you read our guide on CFDs. In a nutshell, CFDs are easily accessible, opening an account can be done in minutes, and trading CFDs is far easier than any other way of trading. Also, it’s fun.
The drawbacks are strange contract rollovers brokers apply, high leverage ratio, and many annoying disruptions that you won’t find in traditional trading. With CFDs, you can take the right direction, literally, and somehow find yourself losing your capital in seconds without understanding what happened. Of course, it can happen in traditional trading as well, but not to the same extent as CFDs.
Nonetheless, if you are looking to short-sell crude sell, CFDs could be the best choice in many cases. It’s fairly easy to open an account, and you can quickly get into a trade without the hassle of having to go through a long registration process. Just make sure you know what leverage is before you make a trade and you know how to calculate each price movement in crude oil or natural gas. Furthermore, we suggest you choose a reputable and reliable CFD broker, so check our guide on the best CFD brokers before making any decision.
The bottom line
So, ironically, these are the two primary ways to short-sell crude oil and natural gas. As a matter of fact, these are the main two ways to short-sell many other commodities. In my opinion, if you are a long-term conservative investor, open an account with a reputable stock or futures contracts brokerage firm, deposit at least $5000-$10000, and short-sell crude oil or natural gas.
Otherwise, if you have a low budget and you are trying to get some extra cash, CFDs are a great solution. But remember, these financial instruments are far from perfect.
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