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Energies in the financial world, are a class of commodity that deals with the buying and selling of energy. Specifically, they refer to the sources of energy. They are traded as derivatives based on an underlying energy asset such as crude oil, electricity, Natural Gas and even CO2 emission certificates. Most of these derivatives are traded on the spot market and in the forward market. Currently, there are approximately more than 20 energy exchanges, with the European Energy Exchange (EEX), New York Mercantile Exchange and the NASDAQ OMX Commodities exchange being the busiest. As the world energy consumption increases, energy as a commodity is gaining more and more significance.
show moreTrading Energy
The bulk of energy trading is focused on crude oil. Trading crude has always been dominated by the large oil corporations such as Amoco, BP, Chevron, Elf, Exxon, Mobil, Shell, Texaco, and Total as part of their ancillary service. The main reason for engaging in this activity is to try and stabilize prices due to the external instabilities inherent in the crude oil industry. Nevertheless, retail traders are still able to profit from trading the swings and trends of the energy markets.
Compared to other types of financial trading, energy trading is much more volatile and fast paced. This is due to the fact that the supply of energies is rather inelastic and prone to influences from external factors such as geopolitical conflicts, the weather and even technological advances. Unless the trader is kept informed of all the latest developments in the market, there is a very high percentage chance that the trader will end up losing money.
As mentioned earlier, energy contracts are traded on the spot market as well as the forward market. The futures contracts can be traded as far as several months into the future. It should be noted that energy contracts tend to more actively traded and volatile as the expiration of the contracts draw near to its expiration date. Volume traded and price fluctuations also increases making the futures contract market resemble the actual market for the underlying asset.
Given the peculiar traits of the energy market, the type of energy charts used will also have an important bearing on the analysis of the markets. For trading in the spot market and especially when the energy contracts are nearing their expiration date, the energy charts used should have shorter time frames. This is to ensure that you will be able to discern all the secondary trends with the shorter time frames. However if the focus is on trading the forward market, then the energy chart used can have longer time frames.
Apart from the charts, when trading the energy market one should also pay close attention to all related news that could possibly affect the energy market. For example if the weather is too cold, this will cause the demand for heating oil to increase and hence pushing the price if heating oil up. On the other hand, if the weather is too hot, this will result in an increase in the demand for electricity as the population turn to air conditioning to cool down. In other words, you should never rely solely on energy charts to base your trading decisions.
