How to Trade Natural Gas Futures Step-by-Step

Trading natural gas futures allows individuals to participate in the energy market by agreeing to buy or sell a specific quantity of natural gas at a predetermined price on a future date. A futures contract is a standardized legal agreement to trade an asset or commodity for future delivery on a regulated exchange. Natural gas, as a commodity, experiences price fluctuations influenced by various market dynamics. This market mechanism provides a way for participants to engage with expected price movements.

Understanding Natural Gas Futures

A natural gas futures contract represents an agreement to buy or sell a standardized quantity of natural gas at a set price on a specific future date. These contracts play a role in the broader energy market by facilitating price discovery, where the market collectively determines the value of natural gas based on expectations of future supply and demand. Producers and consumers can use these contracts for risk management, securing prices for their future needs or output.

Natural gas futures contracts are highly standardized, ensuring uniformity across trades. They are traded on regulated exchanges, such as the New York Mercantile Exchange (NYMEX), which is part of the CME Group. The primary delivery point for these contracts in the United States is Henry Hub in Louisiana, a significant natural gas pipeline distribution hub. A single natural gas futures contract (NG) typically represents 10,000 million British thermal units (MMBtu) of natural gas.

Futures trading inherently involves leverage, which means a relatively small initial investment can control a larger notional value of the underlying asset. This mechanism amplifies the potential impact of price movements on a trader’s account.

Key Considerations Before Trading

Before engaging in natural gas futures trading, prospective participants need to undertake several preparatory steps. This includes establishing a brokerage relationship, understanding the specific contract details, analyzing market influences, and comprehending the financial requirements.

Choosing a brokerage firm that offers futures trading is a necessary first step. To open a futures trading account, individuals typically provide personal identification, financial information, and details about their trading experience. A futures account agreement, which outlines the terms and conditions of trading, must be reviewed and accepted.

Understanding the specific contract specifications is important. For natural gas futures traded on NYMEX, the symbol is NG, and the contract size is 10,000 MMBtu. These specifications, including expiration months and delivery locations, can be found on the exchange’s website.

Natural gas prices are influenced by a range of market drivers that impact supply and demand. Key factors include weather patterns, storage levels of natural gas, geopolitical events affecting production or consumption, and broader economic indicators.

Margin requirements are financial prerequisites for holding a futures position. Initial margin is the amount of funds required to open a new futures trade, acting as a performance bond rather than a down payment for the full contract value. This amount is typically a small percentage of the contract’s total notional value. Maintenance margin is a lower threshold that must be maintained in the account after a position is opened. If the account balance falls below the maintenance margin level, a margin call may be issued, requiring the trader to deposit additional funds to bring the account back up to the initial margin level to avoid forced liquidation of the position.

Executing a Natural Gas Futures Trade

Once the preparatory steps are complete, executing a natural gas futures trade involves a series of procedural actions on a trading platform. This includes entering the trade, monitoring its performance, and eventually closing the position.

Placing an Order

Placing an order involves inputting specific details into a trading system. Traders must select the desired natural gas futures contract, specify the quantity (number of contracts), and choose an order type. Common order types include:
Market order: Aims for immediate execution at the best available current price.
Limit order: Allows a trader to set a specific maximum buying price or minimum selling price, ensuring the trade is executed only at that price or better.
Stop order: Triggered when the market reaches a specified price, converting into either a market order or a limit order depending on its type, often used for risk management.

Monitoring and Margin Calls

After an order is placed and a position is opened, monitoring its performance is ongoing. Daily settlement, also known as mark-to-market, means that profits and losses are realized and settled in cash each day. Traders must be aware of their account balance in relation to the maintenance margin. Should the account equity fall below this level, a margin call will be communicated, necessitating an immediate deposit of funds to restore the balance. Failure to meet a margin call can result in the broker liquidating the position.

Exiting a Position

Exiting a futures position can occur through several methods. The most common is placing an offsetting trade, which means executing an opposite transaction to the original trade. This closes the position and realizes any profit or loss. For commercial entities, physical delivery of the natural gas at the contract’s expiration is an option, though this is rare for individual traders who typically close positions before expiration. Another method is “rolling over” a position, which involves simultaneously closing the expiring contract and opening a new position in a later-dated contract to maintain market exposure without taking delivery.