How to Start Day Trading Natural Gas
The price of natural gas fluctuates from moment to moment, as it is publicly traded on an exchange. The price of natural gas is determined by global supply and demand for the physical commodity, as well as the expectations and supply and demand from traders. Day traders don't assess the "real" value of natural gas. Instead, day traders profit from daily price fluctuations in the commodity, attempting to make money whether it rises, falls or its value stays nearly the same.
Day trading natural gas is speculating on its short-term price movements. Physical natural gas isn't handled or taken possession of, rather all the trading transactions take place electronically and only profits or losses are reflected in the trading account.
There are a number of ways to day trade natural gas. One way is through a futures contract. A futures contract is an agreement to buy or sell something--like natural gas, gold, or wheat--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.
Natural gas futures trade through the Chicago Mercantile Exchange (CME Group). There are several types of natural gas, and contracts, which can be traded. The most heavily traded contract, preferred by day traders, is the Henry Hub Natural Gas Futures (NG). Each contract represents 10,000 million British thermal units (mmBtu).
On the futures exchange, the price of natural gas (NG) fluctuates in $0.001 increments. This increment is called a "tick"--it's the smallest movement a futures contract can make. If you buy or sell a futures contract, how many ticks the price moves away from your entry price determines your profit or loss. To calculate your profit or loss (your trading platform shows you, but it's good to understand how it works) you'll first need to know the tick value of the contract you're trading.
- For a Natural Gas contract (NG) the tick value is $10. This is because the contract represents 10,000 mmBtu, and 10,000 mmBtu multiplied by the $0.001 tick size results in $10. That means for each contract, a one tick movement will result in a profit or loss of $10. If it moves 5 ticks, you win or lose $50. If it moves 5 ticks and you're holding 3 contracts, your profit or loss is $150.
The amount you need in your account to day trade a natural gas (NG) futures contract depends on your futures broker. NinjaTrader for example, requires you have $1000 in your account to open a day trading position for one natural gas (NG) contract. You also need enough in the account to accommodate for potential losses (need much more than $1000).
These figures assume you're day trading and closing out positions before the market closes each day. If you hold positions overnight, you are subject to Initial Margin and Maintenance Margin requirements, which will require you have more money in your account.
ETFs and/or Stock Market
Another way to day trade natural gas is through a fund which trades on a stock exchange, like the United States Natural Gas Fund (UNG). Or, if seeking a more volatile option (moves three times as much each day), the 3X Long Natural Gas ETN. If you have a stock trading account you can trade the price movements in natural gas.
Another popular natural gas product is the 3X Inverse Natual Gas ETN (DGAZ). It moves in the opposite direction of the natural gas price, on a daily basis.
The intraday price movements of these products are reflective of daily (not long-term) percentage price changes in natural gas.
The products trade like stocks. The minimum price movement is $0.01, therefore you make or lose $0.01 for each share you own each time the price changes by a penny. Stocks and ETFs are typically traded in 100 share blocks (called lots) so if the price moves a penny and you're holding 100 shares, you make or lose $1. If the price moves $1, from $5 to $6, you make or lose $100 on your 100 share position. If you are holding 500 shares, you make or lose $500 on that same price move.
The amount you need in your account to day trade a natural gas ETF depends on the price of the ETF, your leverage, and position size.
To day trade stocks or ETFs in the US, you need to have a $25,000 minimum trading account balance. Depending on how much income you want to generate and your leverage, you may wish to have more than $25,000 available to you.