How to Trade Natural Gas Futures
Natural gas is a fossil fuel found in rock formations under the Earth’s surface. Energy companies extract natural gas and transport it through extensive pipeline networks. Pricing for this commodity is typically based on the price of natural gas delivered to the Henry Hub pipeline 1 in Louisiana.
Most natural gas in the United States is used to power turbines that generate electricity. Industries use natural gas for heating and as a raw material to make fertilizers, chemicals and hydrogen. Residences — which use natural gas to heat homes and water, as well as for cooking — are the next largest consumer segment.
Natural gas futures contracts are actively traded. If you’re looking to trade natural gas, follow this guide and learn how to buy natural gas futures.
Here’s a basic overview of how to get started
Contract Specifications
Below are the specifications for a natural gas futures contract.
Exchange: Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE).
Ticker symbol: The base symbol for natural gas is NG. The symbol for a specific contract includes the month and year. For example, the March 2022 contract would be NGH22, where H is the code for March.
Contract: Natural gas is measured in cubic feet, which is the amount of gas needed to fill one cubic foot of volume under specific temperature and pressure conditions. Larger amounts of natural gas are measured in therms, which equals 100 cubic feet. One MCF is equal to 1,000 cubic feet. Typically, 1 therm is equivalent to 100,000 British Thermal Units (BTUs). Each contract holds 10,000 MMBTU.
Minimum tick value: The tick value of a natural gas contract is $10. Since natural gas prices fluctuate in increments of $0.001, 10,000 MMBTUs multiplied by $0.001 equals $10.
Trading months: Natural gas futures have contracts for every month of the year.
Trading hours: Natural gas trading is available 24 hours a day, Sunday through Friday.
Natural Gas Trading Basics
These are the fundamentals to consider when forming your strategy for buying natural gas futures contracts.
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Margin Requirements and Trading Strategy
Margin requirements are set by the CME and can change at any time. The initial margin requirement for swing trading is higher than the margin needed for day-trading, which requires all positions to be closed before the end of the day.
With knowledge of the fundamentals that may affect natural gas prices, you can begin to form your own judgments about the direction of the market.
For swing trading strategies, some traders weigh the fundamentals and look at long-term trends that might affect supply and demand in the marketplace. You can also combine fundamental analysis of the market for natural gas with technical indicators, such as moving averages or candle charts, to make informed decisions about whether to buy or sell.
You can use TradeStation’s analytical tools to back-test or do paper trading to test your strategy.
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Sources
- CME Group. “Henry Hub Natural Gas Futures“
- https://eia.gov/energyexplained/natural-gas/use-of-natural-gas.php
- U.S. Energy Information. “Short-term Energy Outlook”
Important Information: This content is for informational and educational purposes only. This is not a recommendation regarding any investment or investment strategy.
Investing involves risks. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options, futures, or digital assets); therefore, you should not invest or risk money that you cannot afford to lose. Before trading any asset class, first read the relevant risk disclosure statements on the Important Documents page, found here: www.tradestation.com/important-information.
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