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What are the Best Tips for Natural Gas Futures Trading?

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  • Written By: Justin Riche
  • Edited By: A. Joseph
  • Last Modified Date: 29 September 2016
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Up to a certain extent, natural gas futures trading necessitates having a propensity for risk, because this market is known for its violent price swings. An aggressive trader who uses the appropriate strategies is the type who will mostly suit natural gas futures trading. The mount of leverage to be used should ideally be kept to a minimum, because leverage will likely emphasize the risks that are already associated with natural gas futures, despite the promises of big gains. It can pay dividends down the line if a trader learns even the little peculiar things about natural gas futures trading, such as terms like "backwardation" and what they mean.

Just like any other investment endeavor, natural gas futures trading demands the utmost discipline from the trader. The right amount of discipline will likely engender the right practices, such as focusing, doing the necessary research and assessing the conditions that govern price moves. With these traits, the trader can plan his or her trades and execute them according to his or her goals. This is necessary because going in and out of the natural gas futures market on a whim can often be hazardous.

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Understanding the trends regarding the production and consumption of natural gas can be crucial for a trader. This is because the amount being produced and that which is demanded by consumers will influence natural gas prices. For example, the industrial sector is a major user of natural gas, so a rise in activity in this sector will likely boost this commodity's price. Monitoring the Producer Price Index (PPI), for instance, a trader can get an indication of the activity from this sector.

Natural gas mainly belongs to the energy sector, so keeping a close eye on the entire sector will give clues to the trader about the conditions of that market. That is because assets in the same class tend to move more or less in tandem. Moreover, winter seasons are usually positive for natural gas prices as the demand is increased, and that is because natural gas is used for heating purposes in both residential homes and commercial premises. This is also accentuated in times of economic prosperity, because there is an overall increase in demand.

Consulting a reputable futures trading websites on a weekly basis can be beneficial in natural gas futures trading. This type of site typically shows the weekly changes of open positions by large commercial hedge operators, speculators with deep pockets and even small traders. One needs to understand that these hedge operators and large speculators trade futures contracts in colossal sizes that truly move the prices. Therefore, learning how to use the COT should be added on the to-do list of a natural gas futures trader.

Ideally, there are two terms that a futures trader should know when trading this market in general: "contango" and "backwardation." Since the pricing of futures contracts change on a monthly basis, the market is referred to as contango when the coming months' contracts are trading higher than the current month and every month forward is higher than the month preceding it. This is the same case when the coming months' contracts are priced higher compared to spot market prices. Accordingly, contango is a telltale sign of possible rise in futures prices. Conversely, backwardation works exactly in the reverse manner.

An investor who is trading natural gas stocks should be aware of geopolitical risks that might hinder the performance of the stocks. For instance, in 2006, the Bolivian government took over the natural gas industry, which affected major foreign companies that were involved in that industry in Bolivia. Obviously, this took a toll on the companies' stock prices, because those corporations were kicked out at that time. Depending on conditions, however, natural gas stocks can be a better alternative for traders who are not that aggressive, because they will give them exposure to the market without the wide fluctuations of the futures prices.

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