Natural Gas Trading Strategy (Backtest And Futures Example)
Last Updated on May 27, 2023
Contributing nearly a third of world energy consumption, natural gas is the second most used form of energy in the world today. This is why natural gas futures are very actively traded on commodity exchanges, as investors use it to diversify their portfolios into the commodity market, hedge risk exposures, or simply speculate on price fluctuations. What is a natural gas futures strategy?
A natural gas futures strategy is the technique and method you can use to profitably trade natural gas futures contracts. Natural gas futures refer to futures contracts whose underlying asset is a specified quantity of natural gas. Trading on ICE Futures Europe and CME, the contract represents a legally binding agreement to buy or sell a specified quantity of natural gas on a future date, at a pre-agreed price. A good natural gas futures strategy would include technical and fundamental analyses for market timing and risk management techniques.
In this post, we answer some questions about the Natural Gas futures strategy. To help you get started trading natural gas, we lose make a backtest.
What are Natural Gas futures?
In today’s world, natural gas is used in a lot of ways: fueling vehicles (as it produces less pollution), powering industrial furnaces, heating homes and offices, boiling water, cooking food, and running air conditioning units. In fact, natural gas accounts for over 25% of energy use in the US and up to 1/3rd of global energy use. This is why the commodity is very actively traded on the futures market.
Natural gas futures refer to a financial derivative product that represents a contract to buy or sell a specified quantity of natural gas on a future date, at a pre-agreed price. The contract trades on ICE Futures Europe where it is cash-settled, as well as on the CME Globex platform where it is deliverable. Natural gas futures provide opportunities for industry stakeholders to hedge their risk exposure in the market and allow traders to profit from speculating on price fluctuations. It is also a good market for diversifying your portfolio into the commodity market.
What is a Natural Gas futures strategy?
A natural gas futures strategy refers to the methodologies and techniques you can use to profitably trade natural gas futures contracts. It refers to the technical and fundamental analyses traders perform to time the heating futures market, as well as the techniques for position sizing and other risk management methods.
To succeed in trading the coffee futures market, you will need a robust trading strategy that offers precise entry and exit signals, whether you are trading for speculation, portfolio diversification, or hedging purposes.
Natural Gas futures strategy backtest
A backtest with strict trading rules, settings, statistics, and historical performance is coming soon.
What is the seasonality of Natural Gas futures?
Seasonality in natural gas futures refers to the tendency of natural gas futures prices to move in a fairly predictable way during certain periods of the year. The periods here may refer to the months of the year or the four seasons (winter, spring, summer, and fall) of the year.
Historically, natural gas futures tend to perform better during spring and fall than during the summer and winter. However, the contracts does quite well in September, as you can see in the chart below:
What moves the Natural Gas market — What affects the Natural Gas market the most?
Some of the factors that move the natural gas market include:
- Storage and inventory report: The Energy Information Administration (EIA), an independent department of the United States Department of Energy, publishes weekly storage and inventory reports that often cause significant volatility in natural gas prices. You have to keep an eye on it if you want to trade natural gas futures.
- Weather situations: Demand for natural gas typically increases in the build-up to the winter season, as people use it to heat their homes during winter. Extreme cold weather can also have a negative impact on productivity. Prices can rise as a result of both a gain in supply and a decline in demand.
- Economic activity: A boost in economic activity would cause a rise in natural gas prices as well as a rise in demand.
How are Natural Gas futures traded?
Natural gas futures contracts are traded on ICE Futures Europe and CME Group’s Globex platform. On the CME Globex platform, the contract trades from Sunday to Friday, from 6:00 p.m. – 5:00 p.m. ET (5:00 p.m. – 4:00 p.m. /CT) with a 60-minute break each day beginning at 5:00 p.m. (4:00 p.m. CT).
One full contract unit of natural gas futures is equivalent to 10,000 MMBtu, and the price quotation is in US dollars and cents per MMBtu. There are monthly contracts listed for the current year and the next 12 calendar years, with monthly contracts listed for a new calendar year following the termination of trading in the December contract of the current year. Settlement is by physical delivery, and trading terminates on the 3rd last business day of the month prior to the contract month.
How do you start trading Natural Gas futures?
You trade the contract through a futures broker that will grant you access to the exchange where natural gas futures contracts are traded and also help to clear your trades. So, the first step is to register with a futures broker and fund your account — you only need to have a little above the required margin to start trading. For the full contract, the margin is $9,000 for the January 2023 contract.
If you just want to speculate on price movements, you may trade the CFD of natural gas futures contracts via an online CFD broker, such as IG. With a CFD contract, you are in an agreement with the broker to exchange the price difference between the opening and closing of a trade. So, you only trade price fluctuations without having to worry about the rigors of asset delivery in direct futures trading.
What is the Natural Gas trading at?
Natural gas futures were trading at $6.119 per MMBtu as of December 8, 2022. See the chart here on the CME platform chart. The chart was captured from TradingView.
Note that since the price changes from time to time, what is quoted here may not be the price it would be trading when you are reading this post. To get the real-time price on the CME platform or directly from TradingView, click either of those links.
What’s Natural Gas futures hour?
On the CME Globex electronic platform, natural gas futures trade from Sunday to Friday, from 6:00 p.m. – 5:00 p.m. ET (5:00 p.m. – 4:00 p.m. CT) with a 60-minute break each day beginning at 5:00 p.m. (4:00 p.m. CT) Monday to Thursday for maintenance.
The trading hours for Trading at Settlement (TAS) is Sunday – Friday, from 6:00 p.m. to 2:30 p.m. ET (5:00 p.m. – 1:30 p.m. CT). For CME ClearPort, the schedule is from Sunday to Friday, from 5:00 p.m. – 4:00 p.m. CT. There is no reporting Monday – Thursday from 4:00 p.m. – 5:00 p.m. CT.
Where can I find trading charts?
The chart can be found on any trading platform that provides chart services. If your platform does provide charts, you can use TradingView, which provides free access to the charts of various instruments. However, to connect TradingView to your broker, you must subscribe to its Pro services. From the CME platform, you can also access the TradingView chart.
You can also use Yahoo Finance, which offers free chart services or subscribe to trading charts through a paid third-party platform like MultiCharts.
What are the trading symbols for Natural Gas futures?
On the CME platform the product codes for natural gas futures are as follows:
- CME Globex: NG
- CME ClearPort: NG
- Clearing: NG
- TAS: NGT
What is the specification for the Natural Gas futures contract?
On the CME platform, one contract unit of natural gas futures is equivalent to 10,000 MMBtu, which is worth $61,190 at the current price of natural gas per MMBtu, but the margin requirement is $9,000 for the January 2023 contract. The price quotation is in US dollars and cents per MMBtu, and the minimum price fluctuation is 0.001 per MMBtu = $10.00 per contract.
There are monthly contracts listed for the current year and the next 12 calendar years, with monthly contracts listed for a new calendar year following the termination of trading in the December contract of the current year. Settlement is by physical delivery, and trading terminates on the 3rd last business day of the month prior to the contract month.
Why should you start trading Natural Gas futures?
These are some of the reasons why you may want to trade natural gas futures:
- To diversify your portfolio into the commodity market
- To speculate on natural gas prices and profit from price fluctuations
- To secure a stable supply of natural gas if you need it to run your factory
- To secure a good price for your product if you are a natural gas supplier
What is the contract size?
One contract unit of natural gas futures is equivalent to 10,000 MMBtu. Given the current price of natural gas at $6.119 per MMBtu, as of writing, the USD worth of the contract is 10,000 x $6.119 = $61,190.
What is the tick size?
The tick size is $10.00 per contract.
What is the minimum price fluctuation for Natural Gas futures?
The minimum price fluctuation is one-tenth of a cent ($0.001) per MMBtu.
Are there any ETFs?
Yes, these are some of them:
- iPath Series B Bloomberg Natural Gas Subindex Total Return ETN (GAZ)
- ProShares Ultra Bloomberg Natural Gas (BOIL)
- United States Natural Gas Fund LP (UNG)
- ProShares UltraShort Bloomberg Natural Gas (KOLD)
- United States 12 Month Natural Gas Fund LP (UNL)
What factors affect Natural Gas prices?
The factors that affect natural gas prices include:
- Storage and inventory report, which is published every week by the United States Department of Energy
- Weather situations, as the demand for natural gas typically increases in preparation for the winter season
- The level of economic activity can cause a rise in natural gas prices as well as a rise in demand
What is the all-time high for Natural Gas futures?
Based on the TradingView chart for natural gas futures (NG), the all-time high for the natural gas futures contract is $15.780 per MMBtu, which was reached in December 2005.
What are the biggest risks in trading Natural Gas futures?
The biggest risk when trading any type of futures, including natural gas futures contracts, comes from adverse price movement. Futures are leveraged instruments, so the losses are calculated using the actual value of the contract size traded, rather than the margin deposited.
For example, if you trade with a 20x leverage, a 1% adverse movement would lead to a 20% loss, and a 5% negative movement would result in a 100% loss in your account (wipe out your account). On the other hand, if you trade with a 2x leverage, a 1% negative move would only cause a 2% loss n your account, and it would require a 50% adverse move to wipe out your account.
What is the settlement method?
On the CME platform, settlement is by physical delivery.
What is the settlement procedure?
There is the normal daily settlement where the daily differences are settled by CME Group staff based on trading activity on CME Globex during the settlement period — defined as: 14:28:00 to 14:30:00 ET.
On expiry, the seller delivers the specified quantity of natural gas to the buyer, under the supervision of the exchange.
What is the block minimum for Natural Gas futures?
50 contracts
What is the difference between Natural Gas futures and the CFD for Natural Gas?
Natural gas futures have expiry dates and may involve the delivery of natural gas, while natural gas CFDs can be traded indefinitely without the issue of contract expiry or asset delivery.
Which forex pair is the same as Natural Gas futures
Natural Gas CFD
What are some important dates for this market?
Here are some important dates in the natural gas market:
- 1836: The city of Philadelphia created the first municipally owned natural gas distribution venture
- April 1990: NYMEX began offering standardized natural gas contracts with delivery at the Henry Hub
- December 2005: Natural gas futures made its current all-time high of $15.780
What is the highest Natural Gas has ever been — its all-time high?
Based on the TradingView chart for natural gas futures (NG), the highest level natural gas futures has ever reached was $15.780 per MMBtu. It got to this level in December 2005.
What is the lowest Natural Gas has ever been — its all-time low?
Based on the TradingView chart for natural gas futures (NG), the lowest level natural gas futures has ever fallen to was $1.040 per MMBtu. It fell to this level in January 1992.
Conclusion
Trading natural gas futures offer a good way to diversify your trading portfolio into the commodity market, speculate on price fluctuations, or hedge your exposure in the market. However, you need to use a reliable natural gas futures strategy if you want to trade successfully.