best natural gas trading strategy

Best Natural Gas Trading Strategy to Make the Winning Trades

Dedicated trading exchanges like IGX (Indian Gas Exchange) have recently been established to help trade in natural gas. But most of the natural gas trading in India presently happens on MCX (Multi-commodity exchange). 

To trade natural gas you need to have a trading account with any of the stockbrokers like Zerodha, Upstox, 5Paisa, or others who offer commodity trading on MCX.

Demat account is not necessary when you are only trading in natural gas because all the trades are settled on a cash basis. You only need to have a trading account and a linked bank account. 

Natural gas trading happens on MCX from  9:00 a.m. to 11:30 p.m on all weekdays, i.e. Monday to Friday.

Best Natural Gas Trading Strategy in India 2020

#1. Bollinger Bands Trading Strategy

Bollinger bands can be used by both  beginner as well as expert traders. The trading strategy was developed by John Bollinger in the 1980s.

Understanding Bollinger Band

The Bollinger band is made up of a set of three lines. The middle line is the simple moving average of the last 20 candles price and hence the candlesticks (price) tend to move around the middle line.

The two lines on either side of the middle line are the 2x standard deviation (positive and negative) calculated from the 20 candle prices. So it’s like, you have 20 price points and then the standard deviation is calculated which is multiplied by 2 to get 2 standard deviations.

In an ideal scenario, the prices should move within the band. But that rarely happens, as the market moves depending on various factors like economic, geographic, climatic and political.  

The Strategy 

When there are more buyers the prices move out of the band till the time it is overbought.

After which, the prices cool down and then once again move back to the middle line. 

You can sell when the red candles re-enter the upper band and tend to move lower as shown in the chart.

Bollinger Bands Trading Strategy Chart 1

The opposite of the above scenario equally holds good – when there are more sellers, they continuously push the price down till the market is in an oversold zone. 

After which the buying picks up and the prices (green candle) re-enter the lower band and start heading to the middle line as shown in the chart.

Bollinger Bands Trading Strategy Chart 2

The Bollinger band natural gas trading strategy can be used in a normal market where you have prices moving on both sides of the middle line. 

In such a scenario the trading opportunities are easily identifiable like the one shown below.

Bollinger Bands Trading Strategy Chart 3

However, the above strategy fails to work when the prices are moving upward (up-trend) or downward (down-trend) sharply. 

This can be due to some global news/factors that have caused continuous selling/ buying or the markets are at the peak or bottom. 

You can check the chart below.

Bollinger Bands Trading Strategy Chart 4

When in trend, the prices (green candle) hardly increase or cross the middle line but fall sharply after a few more candles. Entering a buy trade while in trend will be a disaster because the prices continuously move down until the trend is broken.

Bollinger bands also indicate trends. When in trend, the candles move along the lower (down-trend) or the upper (upt-rend). There are chances of some pullbacks till the middle line but eventually, prices follow the trend.

The trend does not break until the candle crosses the middle line and touches the other side of the band. This means the down-trend gets broken when the candle touches the upper band on the other side of the middle line. Likewise, the upt-rend breaks when the candle touches the lower band on the other side of the middle line.

The Bollinger band has medium-level reliability and you should be careful not to use the strategy when the prices are moving in trends. 

How to Trade Natural Gas in India 2020

In India, natural gas trading falls under derivatives (F&O) trading. For trading on the exchange, natural gas is available in the form of futures contracts.  

To trade in natural gas, you need to log into your trading account using the ID and password provided by your commodity broker.

5paisa Login screen

Create a watchlist including the latest natural gas futures contract. 

5paisa commodity natural gas Watchlist

Now, you can open the charts and view the natural gas market and make your analysis and studies. As per your strategy, you can enter a buy or sell trade. 

To buy natural gas, click on the Green “B” button and the trade window will pop up with all the details and the amount. Click on “Buy” to place the buy trade.

5paisa buy sell tab
Buy Natural Gas

To sell natural gas, click on the Red “S” button and the trade window will pop up with all the details and the amount. Click on “Sell” to place the sell trade.

Sell Natural Gas

Before you start trading natural gas, you need to know the following:

#1. Natural Gas Contracts

To trade in natural gas you need to buy/sell the available natural gas futures contracts. At any point in time 3 calendar months futures contracts will be available for trading. 

For example, if you are in July 2020 then there will be natural gas futures contracts for July 2020, August 2020 and September 2020 available for trading on exchanges.

The present month futures contract (July 2020) is known as the near month contract. The near-month contract will be the most liquid among the three contracts.

The August 2020 natural gas contract is known as the next month contract and the September 2020 natural gas contract is the far month contract.

#2. Trading Unit and Tick Size

Natural gas futures contracts are traded in lots. At a minimum, you can buy/sell 1 lot  (trading unit) of natural gas. In 1 lot of natural gas futures contract has 1250 mmBtu natural gas value.  

The mmBtu (Metric Million British Thermal Unit) is a unit traditionally used to measure heat content or energy value. The mmBtu is associated with the measurement of natural gas in the energy terms globally.

The minimum tick size (i.e. minimum price movements) is 10 paise (0.10 Rupee). This means any 10 paisa movement in natural gas price on one lot will affect your position by 0.10 x 1250 = Rs. 125.

#3. Contract Size

Natural gas is futures contracts with 1 lot having an underlying asset of 1250 mmBtu value of natural gas energy. 

The contract size is determined by multiplying the current price with the underlying asset value. For example, if the current trading price of natural gas is Rs. 133.20 then the contract size will be Rs. 133.20 x 1250 = Rs. 1,66,500.

#4. Margins

To trade in natural gas your commodity broker offers you leverage (margins) that can vary from broker to broker. You need not pay the full contract amount of Rs. 1,66,500. But certainly, you are required to pay 10% to 15% margins.

So, if your broker allows a 10% margin then you need to pay Rs. 1,66,500 x 10% = Rs. 16,650 for buying/ selling one lot of natural gas futures contracts.

Please note that leverage/ margins made available by your broker is borrowed money and need to be repaid back. You should use leverage/ margins carefully – only to the extent where you can bear losses in case the natural gas prices move against your trade prediction. 

Natural Gas Trading Tips

  • Do not trade against the trend. Meaning when the market is falling do not take long position thinking of the oversold condition until the trend is broken. Likewise, do not take a short position in up-trend assuming of the oversold market condition till the trend is broken.
  • Use a stop-loss limit every time you trade because it cuts your position and protects you from making further losses in case of sharp price movements.
  • Trade with a profit target in mind and close your position immediately when the target is achieved. Do not let greed come in action and avoid extending the target profit price. The markets are volatile and a profit position can quickly turn into a loss position.
  • Trade more number of times capturing small price movements instead of waiting for a big price movement. This will get you regular profit whereas the big price movement may or may not happen.  

Final Thoughts 

Natural gas trading is not that difficult, you can trade and make money (have a positive cash flow) every month if you are disciplined and follow the strategy. 

You need to be alert in identifying the trades and strictly trade with profit targets in mind and placing stop-loss limits.