Ask Trader Ed

Question:

I’m new to trading, but I think natural gas is cheap, and it almost has to go up. How would you play this market?

Newbie from Tradertown

Answer:

First off, as a “new” trader” I would be careful about trading futures. Even seasoned traders will tell you this is risky business. But, if you want to do it, get to know your market intimately. The excerpt below demonstrates the point I am making.

Trading Natural Gas

The NYMEX Division natural gas futures contract is widely used as a national benchmark price. The futures contract trades in units of 10,000 million British thermal units (mmBtu). The price is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits.The spread between natural gas futures and electricity futures called the spark spread can be used to manage risk exposure in the energy markets. Two financially-settled natural gas (HH & HP) contracts are available for trading on the CME Globex system and clears through the New York Mercantile Exchange clearinghouse. The HH contract settles on the same date as the physically-delivered NG contract and HP is a penultimate contract. Both contracts are listed for 72 months. The NYMEX miNY™ natural gas futures contract, designed for investment portfolios, is the equivalent of 2,500 mmBtu of natural gas, 25% of the size of a standard futures contract.

As to how I would play this market, well, I wouldn’t, at least for now. Here’s why. I never jump on a bandwagon. Here is a statistic taken from a June 25, 2009 article in BusinessWeekabout this very subject.

They’re piling into the simplest form of a pure play on gas prices, the U.S. Natural Gas Exchange-Traded Fund. Assets in the fund, which invests mainly in gas futures contracts, have gone from less than $700 million in February to more than $4 billion in June.

So far, this “bet” has not paid off because …

Soaring production combined with declining demand from power plants, factories, and other industrial users has left storage facilities with near-record levels of natural gas in inventories.

This could change, of course, and it might become a money making play, but until you are solid with trading futures, and the market conditions change, I would find another good play.

Trader Ed

I don’t know about you, but I am seeing real opportunity in front of us. Maybe the ease and quiet of sitting here in my anti-gravity chair creates this optimistic vision, or maybe, as both a trader and investor, I constantly seek opportunity, so it is more available. I am inclined to the latter thought.

You see, I believe in the cliché that whatever is in front of us is what we create. For me, Life is about having the right viewpoint, collecting the right information, and making the right choices. This belief transcends any particular aspect of my life, so my trading/investing is subject to this philosophy as much as my relationships are, my business dealings are, or when I saddle up and ride into the back country on my bitchy mare (She is a tale for another day.). The point is, Life is what we make it, and I choose to make it an overarching opportunity.

Much like Mt. Baldy, the peak in front of me, rising some 1500 feet above the ranch, opportunity is ever-present, but sometimes we simply don’t see it, even though it looms in our lives. Some days all I see is the minutiae of living, so I never “see” Mt. Baldy, even though that big rock never moves. This is my second point. In order to see opportunity, we have to lift our eyes from the minutia of Life and simply look around. If we lift our eyes and look around at the markets, real opportunity exists in the technology, financial, and real estate/construction sectors for sure. Opportunity also exists in energy, biotech, and nanotech, given the tens of billions now available for research and development, infrastructure construction, and business expansion in these areas.

My final point today is that the market movements themselves are presenting opportunity in the mild volatility of the markets these days. I say “mild” because it is, compared to the unprecedented volatility we experienced last fall when our financial system seemed on the brink of utter failure. For my style of trading, I love the rolling swells more than the peaks and troughs. For my style of living, I want to look up at Mt. Baldy and plot the trail to the top, rather than sit here on such a beautiful day and not “see” the big rock because my thoughts take me to a less opportunistic place.

This move to California has changed everything for me, including this blog. With all this sunshine, cool breezes, and quiet ranch living, I have come to realize that I don’t want this blog to be just about me. Frankly, I’m tired of me. I want to know more about you as individuals out there in the Ethernet. You see, quietly sitting outside under the trees has brought you to mind enough now that I wonder, who are you? What are your thoughts about, well, trading for sure, but, and as well, Life? I am curious about you and your trading. Are you successful? How successful are you? Are you having trading problems? Do you wish you knew more about how to find good trades? Is trading a benefit to your life, or not? My questions could go on and on, but, truly, I am more interested in your questions. Actually, if I am honest, I am looking to satisfy my desire to help out where I can. Trading is one area where my knowledge just might help you become a better trader, and, who knows, our discussions might light a path for each of us to become better people and better traders. In my humble opinion, better people make better traders, as successful trading is less about the markets and more about how you behave when trading. With this mind, maybe we can help each other in this blog. Maybe, if we try, we can improve our trading skills by improving upon ourselves … What do you think?

The weather here is just about as good as it gets. It is so good it feeds my optimism about the direction of the stock markets. Okay, maybe it is more than the weather that spurs my optimism. Perhaps, it is the VIX and VXN dropping below 30 for the first time since last August. Perhaps it is the price of oil reflecting optimism that the global economy is hitting bottom. Maybe it is my belief that, after some churning in the mud, the global economy will begin to float upward again, perhaps as early as October. You know, it could also be my recent plays in homebuilding and financial stocks have paid out nicely. Whatever the reason, I am more optimistic today the economy has hit bottom than I have been, well, in quite some time. Oh, oh, oh … Sorry, a beautifully orange grosbeak just flew past me … Anyway, I am opening up my trading again after a long period of watching, just watching, much I like I do with the birds flying in and out of the Blue and Live Oak trees surrounding me. When I watch the birds carefully, I often see things I normally don’t see, like that richly colored grosbeak that flew past a moment ago. I learn about their flying patterns, feeding habits, and nesting choices. After awhile, the birds that I know become somewhat predictable. This past 10 months of economic and market turmoil allowed me to see things I normally didn’t in the markets. I am now a better student of trading because I really pay attention, and the collapse of it all made this so. Although no one, and I repeat, no one, can consistently predict market movement, I am now learning that watching certain markets in volatile times points up patterns in both the overall markets, and with those markets in particular. Like the birds I now know well, the trick is to sit quietly and just watch.

I have updated my profile based on my recent move to California. Check it out. At least you’ll then understand the reason for the “new” blog coming your way. Yes, I said new. You see, since moving here (the beautiful Central Coast of California), I have experienced a mind shift. My sensibilities are different. I am, you might say, a completely different person with a new focus in life. Part of that focus is writing to you well enough so you will respond, so you will interact with me about the topics I open up. Generally, I will write about trading, outdoor living, and writing, but my mind is open and the possibilities for discussion are, well, vast. So, even though you might know the “old” me, don’t miss that person. Instead, take some time to get to know the new me. It might be fun and educational.