Energy Sector Trading Strategy: Rules, Backtest, and Practical Example

Energy sector trading is the process of gaining exposure to multiple stocks in the energy sector as a means of diversification and generating profits. Investment can be done by buying an ETF that tracks the sector or by building a portfolio of energy stocks.

If you want to trade energy stocks for short-term trading, the most likely option is to trade the stocks themselves or to trade the ETF with the ticker code XLE. In this article, we provide you with two energy sector trading strategies (XLE trading strategy).

If you want to read more about ETFs we recommend this old article:

What is the S&P Energy sector?

The S&P 500 energy sector comprises stocks in the energy sector that are in the main index (S&P 500). Those are stocks of companies that do business in the oil and natural gas industry, including oil and gas exploration, refining, and distribution of products. It also includes the related businesses that provide equipment, materials, and services to oil and gas producers.

Vanguard Energy ETF (VDE) and Energy Select Sector SPDR Fund (XLE) are the major ETFs that track the energy sector. And looking at their performance over the past couple of months, the sector has beaten the broader market with a one-year total return as high as 52.81% as compared to the S&P 500 index which has a net return of about -9.28% as of 18th July 2022.

The performance difference is exactly why you might want to trade the energy sector: it offers diversification. When you are both investing long term or trading short term you want to have assets that don’t move in tandem. The more they move independently of each other, the better. Please read more about this in our other articles about the subject:

Oil trading strategies (list)

Here you can find all our Crude Oil Trading Strategies.

What are the 5 biggest stocks in the sector?

The 5 biggest stocks in the S&P 500 energy sector include:

  • Exxon Mobil Corporation (XOM): The company is a world leader in the energy sector and one of the largest publicly traded stocks. The company produces a variety of products to meet the needs of customers such as Butyl, Polymer modifiers, polypropylene, solvents, fluids, etc. XOM, as of July 18, 2022, has a total market capitalization of $356.1B with a year-to-date (YTD) return of 33.05%, outperforming the S&P 500 index which is currently struggling.
  • Chevron Corporation (CVX): This is a multinational company that engages in petroleum operations, such as exploration, production, and refining. Their products include lubricants like Texaco and Caltex which are recognized worldwide. CVX as of July 18, 2022, has a total market capitalization of $270.46B with a YTD return of 18.39% which outperforms the broader market.
  • ConocoPhillips (COP): The company explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids worldwide. It primarily engages in the conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations in North America, Europe, Asia, and Australia. The company has a market cap of $117.330 billion as of July 2022.
  • EOG Resources, Inc. (EOG): The company, together with its subsidiaries, engages in oil and gas exploration, development, production, and marketing of crude oil. Its principal producing areas are in New Mexico and Texas in the United States, as well as the Republic of Trinidad and Tobago. Its market cap as of July 20, 2022, is $61.834 billion.
  • Schlumberger Limited (SLB): The company provides technology for the energy industry worldwide, offering software, information management, and IT infrastructure services. It provides consulting services for reservoir characterization, field development planning, and production enhancement, as well as petro technical data services and training solutions, reservoir interpretation and data processing services, and asset performance solutions. As of July 20, 2022, the stock’s market capitalization is $48.256 billion.

However, by the time you read this article the list above might be different. The reason is simple: The market is always in a state of flux and companies come and go. To read more about this please read our article called Do Stocks Outperform Treasury Bills? The answer is not what you expect! The fact is that the majority of the stocks underperform a market-weighted index.

Energy sector trading strategy no 1 (XLE trading strategy)

Let’s make it clear from the start: this is one of the trickiest sectors to trade. In general, anything that is related to commodities is difficult.

Think about it: the oil price is solely influenced by macro factors, and it’s next to impossible to predict where the oil price is months ahead (no matter the time frame, really).

However, a few years back we made a short XLE strategy that takes a position at the open. Average holding time is close to three days, but so far the results are pretty good. This is how the equity curve looks like:

Energy sector trading strategy (XLE trading strategy)
Energy sector trading strategy (XLE trading strategy)

There are 198 trades, the average gain is 0.61% per trade, CAGR is 6,4%, the win ratio is 65%, max drawdown is 13%, and the profit factor is 2.1.

We don’t want to reveal the strategy, nor the next one (see below). The reason is simple: all our trading strategies are a result of more than 20 years of trading experience and we see no reason to give it away for free. Furthermore, we might publish the strategies later to our subscribers. Please have a look at our relevant links:

Energy sector trading strategy no 2 (XLE trading strategy)

We have developed another XLE trading strategy that we have had for 6 months demo trading.

Trading Rules


The equity curve looks like this:

Energy sector trading strategy (XLE trading strategy)
Energy sector trading strategy (XLE trading strategy)

The number of trades is 335, average gain is 0.21%, the win rate is 59%, max drawdown is 8%, and the profit factor is 1.75. It’s not the best trading strategy, but it moves differently than the overall market (S&P 500). The annual return is at 3%, 2% lower than the buy and hold returns (not including dividends).

Other sector trading strategies

We have covered all the different subsectors in the S&P 500:

Energy sector trading strategy – ending remarks

The energy sector is difficult to trade, but it might offer great diversification potential if you find something that works. It doesn’t need to be a “perfect strategy” but any diversification is more valuable than finding “the best strategy in S&P 500”. Diversification is the holy grail strategy! That’s why you might want to look at any energy sector trading strategy.


How can I invest in the energy sector, and what are the options available?

Energy sector trading involves gaining exposure to multiple stocks in the energy sector to diversify and generate profits. You can invest in the energy sector by buying an ETF that tracks the sector, such as XLE, or by building a portfolio of individual energy stocks. These options allow you to gain exposure to the overall performance of the energy sector.

Who are the 5 biggest stocks in the S&P 500 energy sector, and why are they significant?

The 5 biggest stocks in the S&P 500 energy sector are Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), ConocoPhillips (COP), EOG Resources, Inc. (EOG), and Schlumberger Limited (SLB). These companies are significant due to their market capitalizations and contributions to the energy industry. The list of the biggest stocks in the energy sector can change due to the dynamic nature of the market.

How can investors approach energy sector trading with a focus on diversification?

Diversification is crucial in the energy sector due to its inherent volatility. Investors can explore different energy sector trading strategies, even if not perfect, to add diversification to their portfolio. Any form of diversification is valuable for stability and risk management.

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