Lessons from the Pros


Natural Gas Thursday

In the futures markets the leverage component inherent in these contracts can be seen as dangerous, and something to avoid by some. However, others welcome the volatility that’s generated by these derivative products. Why is there such a disparity in perceptions? It’s quite simple: Those that know what they’re doing (have a proven  strategy) embrace the big moves that come as a result of the leverage.  On the other hand, traders that lack confidence — those that don’t have a plan— will always shy away from markets when they are moving fast.

Both government reports on the state of the economy, and information about supply and demand in the commodities market can drive volatility. As futures traders we need to know when important market moving news is scheduled to be released because these generally provide us with low- risk, high-reward scenarios.

In this regard, conventional thinking has traders buying as price jumps on perceived good news and selling as price drops on bad news. Here at Online Trading Academy we take a contrarian approach.  That is, when we look at what most traders do after important announcements, we simply want to take the other side of their trades.  Most of the time, reports that are perceived as “good for the market” spike prices into quality supply areas, thus presenting Online Trading Academy trained students with low risk shorting opportunities.  Conversely, bad news by and large will drive traders to sell, resulting in sharp price drops into quality demand zones. This translates into ideal risk-versus- reward buying situations.

In the last several weeks, I’ve received various emails revolving around this theme. This was due to several references I made in the futures XLT’s (Extended Learning Track) that I teach. The comments I made were specifically regarding the natural gas market, or as some students have now deemed “Natural Gas Thursday.”  The main reason I’ve brought this particular market to the attention of my students is simply because it exemplifies the buy -on -weakness, sell- on- strength  scenarios that I mentioned earlier. This particular report is released every Thursday, hence the name.

First, let me begin by saying that this may not be for everyone, since the Natural Gas Futures Contract can be extremely volatile.   For those of you not familiar with this market, let me give you a little background. Here is the link for the contract specifications. It’s important that you become familiar with any futures contract before you trade it. Tick values, trading times, margins etc, can be found here.   In this instance since the contract size is 10,000 million British thermal units (mmBtu), every tick pays $10.00.  As an example if you went long one contract at 3.132 and sold it for 3.232, you would have realized a profit of $1000 (100 x$10.00=$1000). Coincidentally, this size move is very common intraday.

So now that we have the specifications for this contract, let’s review what happens on Thursdays.  This is the day that the U.S Energy Information Administration (EIA) releases the weekly Natural Gas Storage Report which is essentially an inventory report.  As you might have guessed by now, immediately after this information is disseminated, price in the natural gas contract can move dramatically. Quite candidly, we don’t care about the numbers or what they mean to industry insiders. We as traders are mainly interested in the short -term movement caused by this report.  As we can see from the chart below, in the month of October, on every Thursday at 10:30 EST — which are indicated by the vertical line—price spiked into quality supply or demand areas highlighted in yellow, which for the well- prepared trader meant good trading possibilities.

 The key is identifying the entry (quality supply and demand) levels  and then having the orders placed prior to 10:30 EST on Thursdays. This way when price reacts there’s a good chance of getting filled. Like everything else related to trading, there is no silver bullet here, just higher odds. To reiterate, this may not be for everyone, but with the proper training and execution “Natural Gas Thursday” can mean a weekly stream of trading opportunities.

Until next time, I hope everyone has a great week.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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