In fact, natural gas is used to generate over 20% of the world’s electricity. Because of the upsurge in the uses of natural gas, it has quickly become a highly sought-after commodity for savvy traders.
The gas market can be highly volatile, which can result in major profits for day traders if they know the basics of gas trading. In this article, you can learn all about the ins and outs of gas trading.
One of the first questions that a trader should ask themselves is: how does gas trading compare to other financial markets? Generally speaking, natural gas is simply another commodity and should be treated as such when trading. Like other commodities such as oil, copper, or even pork bellies, the price of gas is dictated by worldwide supply and demand.
Natural gas deposits are usually found deep underground in sediment or rock. A process known as fracking is used to extract the gas. As we have mentioned, the natural gas market can be extremely volatile, much more so than more traditional commodities. Taking advantage of natural gas price fluctuations is the best way to maximize profits.
Simply put, natural gas trading comes down to speculating on the short-term price movements of the commodity. No day trader or broker ever assesses the actual value of the gas commodity itself. Trades are made only on the fluctuations of gas prices. Because a trader is not physically taking possession of the gas itself, transactions that involve profits and losses on gas are always made electronically. Gas futures are traded via the Chicago Mercantile Exchange (CME Group). The Henry Hub Natural Gas Futures (NG) is the most popular contract for most day traders. We will take a look at some of the most common natural gas trading strategies later on in this article.
Choose a gas trading broker and open an account
The first step in making money from the natural gas market is finding the right broker for your needs. These days the internet is filled with online day trading brokerages, some more reputable than others. It pays to do your due diligence when selecting a broker to make sure you don’t lose money to an unprofessional outfit. Firstly, check whether the broker is affiliated with the usual regulatory bodies such as the Securities Investor Protection Corporation (SIPC). You should also make sure the broker offers insurance for your deposits and fraud protection. Taking note of any fees and reading up on customer reviews will also help you to get a better idea of a brokerage’s prowess.
How to buy gas futures, options and CFDs
There are three main ways of trading natural gas. The most commonly used natural gas trading method is to purchase futures contracts. A futures contract means that traders will set a predetermined price for a natural gas delivery.
Gas options are another popular trading method. Options are available as ‘puts’ or ‘calls’ and give traders the right to speculate on a commodity price without the risk of having to buy or sell it within a specified time period.
Lastly, there are CFDs (Contracts for Difference). CFDs are a means of hedging your trades since they allow traders to exchange the price difference between the time when the account was opened and when it was closed.
When used in relation to trading, the term ‘leverage’ means that traders and investors pay less than the full stock price of a commodity, allowing them to take a stronger stock position without exposing themselves to the risks of paying full market prices. Usually, a broker will provide the credit for the investor that covers the leveraged amount.
Leveraged trades carry a certain amount of risk and you must have faith in your broker and ensure you have enough buying power. Keep in mind that the risk ratio involved in leveraged trades can be higher than in usual trades. Using leveraged trades allows you to increase your purchasing power but opens you up to the volatility of the market.
Since natural gas is a major part of the worldwide energy market, it is one of the most traded commodities. Both short term day traders and long term investors across the globe compete fiercely to make profits from the highly volatile natural gas market.
So, is it actually possible for smaller investors to make a good profit when trading gas? The answer, as it is with most investment trading, this largely depends on your own appetite for risk and the overall success of your chosen investment strategy. Natural gas trading can be quite profitable if your chosen strategy pays off, but the risks are always there. Having an experienced broker will help you minimize your risk and maximize your profit.
Tips on trading gas
Your ability to make money from the highly volatile natural gas market depends on how well you do your homework. Here we will share with you a few of our top tips for successful gas trading.
Firstly, make sure you understand the forces that can move the price of natural gas. Extreme weather conditions, the availability of alternative fuels and increased economic growth in producing nations can all impact gas prices. Smart traders should also keep an eye on the availability of gas storage facilities. If there is a gas storage surplus, then market prices will more than likely drop. Staying up to date with the current political situation of major gas producers like the USA is also advised.
Pick the right gas trading style and strategy
If you are venturing into the natural gas market, you will need to adopt the right trading style or strategy. Depending on your appetite for risk, you may opt for a long term position or take a high gain day trading option.
Day trading is a good way of making profits from the gas market and is the most common way of trading this commodity. Due to the volatility of the natural gas market, day traders can often make good profits by making a large amount of smaller trades during one trading session. However, traders must have the time to devote to staying up to date with all market developments and the time to commit to the market itself.
The two other main trading strategies are called range trading and breakout trading. Range trading involves a trader investigating the resistance and support levels that correspond with the price of a particular commodity or asset. Traders sell when there are levels of resistance and buy when there is support. Breakout trading means that a trader will speculate correctly on price increases. The basic idea is to buy low and sell high once a commodity has broken through a price level.
Both of these strategies can work well with the volatility of the gas market. As always, caution should be exercised and investors must always be aware of the inherent exposure to risks in volatile markets.
Set your stops and limits
No one would ever give you financial advice that involves spending more money than you can cover. Making smart investments in the gas market means following the same general rules when trading any other kind of commodity or asset. Limiting your exposure to risk requires that you set stops and limits and ensure your broker follows these instructions.
Stops and limit orders are when you instruct a broker to buy or sell a stock once it has reached a specific price – or a more favourable price – in either direction. Once the stock hits the desired price, your trade will be executed. Limit orders are visible to the rest of the market; stop orders are invisible until they are activated.
Large gas price fluctuations are commonplace due to changes in weather, political climates, accidents, and the popularity or development of alternative fuels. All of these potential troublesome areas make the gas market a very risky area to invest in. However, it is precisely these volatile price fluctuations and the great risk involved that makes the natural gas market so profitable and so attractive to investors and traders. If you are willing to absorb some losses and can handle a large degree of exposure to risk, then the gas market is a good option for you. If you prefer to have a slower and more reliable trading strategy, you may want to look to invest your money elsewhere.
With the proliferation of gas fracking in the USA and throughout the world, and the tendency to look to alternative sources of fuel other than oil, the natural gas market is growing rapidly. There are many inherent risks in the gas market, which can often arise without warning. This results in a highly volatile marketplace that can see prices rise and fall dramatically in very short time frames. These characteristics make the gas market perfect for short term investors who can handle risk.
Spotting fuel trends, keeping up to date with the overall political climate in major producing countries like the USA, and being aware of technological innovations are crucial to a successful gas trading strategy.