In this article we will examine the Natural Gas future (Henry Hub Natural Gas) with the intent of developing a trading strategy. We will focus on identifying a recurring behavior of prices, or a bias, that we can exploit systematically to obtain profits. In particular, we will analyze the weekly bias, focusing on a particular characteristic of this commodity.
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Identifying Recurring Price Movements in Natural Gas Futures with Bias Finder Software
In order to analyze the weekly bias we will use one of the software developed by the Unger Academy: the Bias Finder. Through this software it is possible to identify the recurring behaviors of the historical series that we decide to analyze on different time horizons, in addition to the weekly one, such as daily, monthly and yearly. To develop this strategy we will load the Natural Gas data from 01/01/2010 to 31/05/2024 into the Bias Finder, in order to evaluate the behavior of this market during this period.
Looking at figure 1, which illustrates the weekly bias, therefore the average weekly excursion of this raw material, we notice a lateral trend during the first three days of the week, to then witness a decidedly bearish trend, especially during the Thursday session.
Figure 1. Average price trend of Natural Gas futures during the week.
This Thursday bearish movement is certainly influenced, at least in part, by the release of data on natural gas inventories. This data is in fact released every Thursday and evidently affects the price trend in the following hours. This type of information, which we can obtain through the Bias Finder software, is very useful for developing systematic trading strategies, but first we must take a further very important step, that is, evaluate the stability of this bias.
Detailed Analysis of Weekly Bias of Natural Gas Future
To evaluate the stability of the behavior that we have managed to identify, we must proceed with a more detailed analysis and compare the average price trend during the entire period taken into consideration (blue line) with three distinct periods:
- From 2010 to 2014, orange line
- From 2015 to 2019, yellow line
- From 2020 to 2024, purple line
From the analysis we note that the bias was certainly more marked in the phase from 2010 to 2014, in which we note a sharp drop around 10:00 (exchange time) caused by the release of data on inventories. However, this bearish trend has also remained discreetly in the phase from 2015 to 2019 and in the phase from 2020 to 2024, unlike the trend of Monday and Tuesday which instead had an anomalous trend especially in the last phase taken into consideration. This is a confirmation of what we were looking for, that is, the stability of the bias, and at this point we just have to carry out a backtest.
Figure 2. Weekly Bias of Natural Gas during three distinct periods.
Developing a Trading Strategy to Exploit the Weekly Bias of the Natural Gas Future
Based on the analysis done previously, we proceed by setting the rules of a trading strategy. From figure 1 we have noticed how, during the Thursday session, the price of this commodity tends to fall starting from 01:30, exchange time. By doing so, we are actually anticipating the time in which the data on the stocks are released (10:00 exchange time); but through the Bias Finder we have noticed how this can be a good solution for the development of a trading system, as we would be able to ride a larger portion of this bearish trend. We also note how this trend is maintained until 13:00. We can therefore develop a strategy based on these simple rules:
- We will open a short position on Thursday at 01:30.
- We will close the short position a few hours later at 1:00 PM.
Strategy performance tested on historical Natural Gas Future data
At this point, all we have to do is open the Performance Report and analyze the results of this strategy. First of all, analyzing the equity line, we notice a fairly regular growth. Exploiting this bias in the first years after 2010 would certainly have been very advantageous, as we could also notice from the detailed analysis of the Bias Finder, and it seems that this recurring behavior has weakened a bit in recent years, also due to the geopolitical events we have had to face. But all in all, it remains a good equity line considering that it is, for now, a rough strategy.
Analyzing the metrics of this system instead, we note a net profit of $97,000, which is certainly not an excellent result, but considering that with this strategy you only operate a few hours on a single day of the week we can agree that it is a good result. All this in the face of a drawdown of $27,000, which may seem high when compared to the net profit, but we must not forget that each strategy is designed to be subsequently inserted into a well-diversified portfolio, consequently obtaining a more stable total equity.
Figure 3. Profit curve of the strategy that exploits the weekly bearish bias of Natural Gas.
Figure 4. Performance Report of the strategy that exploits the weekly bearish bias of Natural Gas.
Looking at the Total Trade Analysis instead, we notice how the strategy makes a fairly limited number of trades. Since only one position is opened per week, this brings us to having a maximum of 52 trades per year, all on the short side as we decided to develop the system.
As for the average trade, we are faced with a value of $130. This is certainly not a high value, considering that the value of a single tick on this future is $10, however it is large enough to support the operating costs represented by commissions and slippage.
Figure 5. Trade Analysis of the strategy that exploits the weekly bearish bias of Natural Gas.
Final Thoughts on the Bias Strategy on Natural Gas Future
Given the good results produced by the raw strategy, at this point it is possible to proceed with the refinement of the system, for which there are numerous alternatives. For example, given that the way the strategy is set up there are no exit rules other than the time one, it could be decided to insert a stop loss and a take profit in order to optimally manage the open positions.
In this article we have seen how, using the right tools, it is possible to obtain valuable information for the development of strategies. Information that in this case we decided to use to open positions, but that we could also use as an operational filter to not open certain positions. In the specific case of Natural Gas, it could be decided not to open long positions on Thursday given the bearish trend of this day of the week.
In short, there are many paths to take and now it’s up to you to choose the best one.
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See you next time and happy trading!
Andrea Unger