Natural gas is one of the most popular commodities among traders. Its price fluctuates from moment to moment as it is publicly traded on an exchange. The said price is determined by global supply and demand for the physical commodity, as well as the expectations and supply and demand from traders.
In this article, you will learn the major factors forming the price of natural gas and its importance to the economy. You will also learn some of the trend trading strategies, trading instruments used in trading natural gas and why it is popular with day traders. Due to its high volatility, it is crucial to be equipped with trend trading strategies that will help you maximize your profits and avoid losses.
Why is trading natural gas popular with day traders?
Day traders do not assess the real value of natural gas. They profit from daily price fluctuations in the commodity. Instead, they monitor the moment-by-moment fluctuations in the supply and demand of natural gas. They attempt to make money when the value rises, falls or stays almost the same. This type of trading allows the traders to speculate on precise, small price changes in the future market for natural gas.
Since day trading involves monitoring short-term price movements, it, therefore, becomes the popular form of trading natural gas due to its volatile nature.
How to trade natural gas?
There are various ways of day trading natural gas. These include futures, options or derivatives.
Natural Gas Futures
A futures contract is basically an agreement to buy and sell a commodity like natural gas, at a future date. Day traders close out all contracts (trades) each day and make a profit or loss on each trade based on the difference between the price they bought the contract and the price they sold it.
Any interested investor can get gas futures contracts from the Chicago Mercantile Exchange (CME). It is also important to note that several types of natural gas exist thereby leading to the existence of many contracts.
Natural Gas Options
Other than futures, CME also offers an options contract for natural gas. This instrument is particularly designed to trade on price differences with or without any leverage. You should note that options come with a strike price. This is the level above which the options end in money.
Investors who opt to buy options also pay a premium for purchasing contracts. This guarantees success only if the natural gas futures price rises above the strike price by an amount higher than the premium paid. It is crucial that traders accurately guess the volume and projected timeline of the price move in order to maximize profits.
Natural Gas EFTs
Another way of day trading Natural Gas is through investing in ETFs representing the sector. United States Natural Gas Fund (UNG) is responsible for natural gas trades in North America. The other ETFs associated with the natural gas market include ProShare UltraShort Bloomberg Natural Gas (KOLD), ProShare Ultra Bloomberg Natural Gas (BOIL) and the United States 12 Month Natural Gas Fund (UNL).
An exchange-traded fund (ETF) is an investment product that replicates the performance of existing security or group of securities. It uses the physical purchase of assets that it tracks and other sophisticated methods to copy and follow movements in the underlying market.
Trading Accounts and Margins in Natural Gas
To be able to day trade natural gas, you will need to have sufficient funds. However, the amount you need in your account to trade will vary depending on the contract one settles on and on the broker as well. You also need enough in your account to accommodate potential losses. Day trading natural gas is cheaper compared to holding positions overnight. This is because, with day trading, you close out positions before the market closes each day. However, holding overnight positions, you are subjected to initial margin and maintenance margin requirements which need you to have more money in your account. For this reason, day trading natural gas becomes more popular.
Natural gas is a liquid and very volatile commodity. You need to be wise about the strategies you employ to trade natural gas to maximize your profits. Day trading may be the best route to take as it is cheaper and allows you to monitor short-time price movements. You can use any of the three ways of day-trading natural gas discussed and get started in the field