Energy Trading – How to Spread bet the Energy Markets

Energy trading is a hot topic at present as people are very focused on energy prices and these markets are among the most popular for commodities trading. Of course it’s a very simple matter to spread bet the energy markets on any spread betting platform.

There are five main energy markets that can be traded. These are:

  • Crude oil (US)
  • Brent crude
  • Heating oil
  • No leaded gasoline
  • Natural gas

Spread betting these markets carries significant benefit over trading these energy markets via futures trading, which is beyond the scope of most due to the large contract sizes and margin requirements. However, most spread betting companies offer the above markets with spread bets of as little as 10p per point, although most are larger at around 50p. The smallest bet sizes per point I have found on these markets are at ETX Capital.

The spreads on these energy markets are generally tighter for the crude oil markets but are wider for the remaining markets. Crude oil generally has a spread of around 4 ticks, but the others are often as wide as 30 ticks.

Energy trading can be quite volatile and most of these markets have quite large average true ranges (ATR), with no leaded gasoline normally the most volatile. Therefore, even at 50p per point using an appropriate stop to take into account the expected volatility can lead to quite a large bet, so this should be taken into account before opening any trades.

Many novice traders make the mistake of opening a trade and then placing a stop loss after they have opened the trade, generally at their pain threshold, rather than taking into account the volatility and chart structure and then selecting a bet size based on these.

The correct approach is to first use a method of identifying where you would be wrong on the trade and placing your stop just beyond that price, or using a volatility based stop, and then dividing your trading capital allocated for the trade into that amount. That will give a suitable bet size per point. Trading some of these energy markets will be beyond the scope of smaller accounts.

Energy trading can be exciting and profitable and although these markets are generally volatile, they do often trend very well over the long run. At LS Trader we have had some very profitable and long running trends from these markets over the years. This includes back in 2008 when we rode Crude prices up to their all time high at $147 and then also profited from their sharp decline where they fell all the way back to $35 by being short.

According to our proprietary trend analysis at LS Trader, the long-term trends for this sector are currently up, with the exception of U.S. Crude, which is still in a downtrend.

Hopefully this has helped you with your understanding of the energy markets and energy trading.

Good trading

Phil Seaton

P.S. Find out more about the LS Trader system by clicking here

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