Given that market conditions are constantly changing and given that each reader of this page is unique in many respects (type of participant, trading objectives, risk tolerance, etc.), I have opted to present a process oriented approach to developing suitable strategies and tactics, tailored to each type of participant, as opposed to articulating specific market driven recommendations.

An additional point supporting this process oriented approach -- It is important to distinguish the risk inherent in your price forecast from risk inherent in your "as is" performance profile. This is described in greater detail in the Forecasting Dilemma Resolution section of the Management Philosophy page.

Therefore, this page is organized into three main sections:

Idealized Swings	Idealized Natural Gas Price Swing characteristics that constitute the market environment within which we all operate. For a more detailed discussion of the principles underlying this approach, start with the Rational Analysis section of the Analytic Framework page.
Performance Profile	Performance profiles reflecting the characteristics and objectives that differentiate you from other people trading Natural Gas. These profiles illustrate the types of strategies and tactics that are suitable for Producers, End-Users, Marketers, and Traders.
Strategy Matrix	Strategy matrix that, once you have evaluated the natural gas price swings and your "as is" performance profile, will assist in identifying the strategies and tactics most suitable to your situation.

The following chart illustrates several points about natural gas price movement behavior. (Caveat -- although this chart has been created utilizing statistics derived from historic NYMEX natural gas price, time and speed movements, it has been "idealized" to illustrate tendencies, not to represent price forecasts. A table summarizing the time statistics is presented in the Natural Gas Swing Statistics page. For current charts, forecasts, and comments see the Natural Gas Market Analysis related pages.)

Natural gas prices tend to move in a cyclical manner. The overall price cycle can be divided into four distinct phases:

Each phase is comprised of up and down swings. Furthermore, these up and down swings can be catalogued into levels (Major, Intermediate, Minor, Minute). For more detailed comments on this profiling process refer to the Profiling Swing Characteristics section of the Analytic Framework page. Additional observations include:

1. Impulsive swings (swings in the direction of the swing of the next higher level) tend to be longer than the overall average swings.
2. Corrective swings (swings against the direction of the swing of the next higher level) tend to be shorter than the overall average swings.
3. Impulsive swings that occur within the context of an impulsive swing at the next higher swing level tend to be longer and, on many occasions, exhibit faster speeds than impulsive swings that occur within the context of a corrective swing at the next higher swing level.
4. An impulsive swing can be the only swing within the next higher swing level or it can be the first, middle, or last swing.
5. A corrective swing can be a single swing or a series (pattern) of corrective swings.
6. Each type of impulsive and corrective swing (pattern) tends to exhibit its own unique price movement characteristics (price range, time, and speed).
7. Even though the "idealized" Major level swings have been made to appear symmetrical for illustration purposes, in reality opposing swings within each level are not necessarily symmetrical, but they do tend to be relational. Refer to Natural Gas Historic charts and Natural Gas Current charts.

Idealized price swing implications for the development of suitable strategies and tactics:

1. Very few traders, if any, have demonstrated the ability to accurately and consistently forecast future price movements (not to mention the ability to profit from the forecasts even when correct). For a more detailed discussion of this notion, please refer to the Forecasting Dilemma section of the Management Philosophy page. Additionally, we must accept the fact that, as humans, we fail more often times than we succeed. However, it is our efforts to limit the consequences of these failures and, equally important, our efforts to recover from these failures that produce the seeds to our successes. The application of these notions to forecasting future events is that in most market situations, for each swing level, we will be wrong on at least one of five issues:
   • Direction (Which way is the swing going?)
   • Timing (When is the swing point going to occur?)
   • Magnitude (How far is the swing going to travel?)
   • Duration (How long will the swing last?)
   • Speed (Magnitude/Duration - How fast will the swing move?)
2. Notwithstanding the difficulty of attempting to forecast future events (implication (1) above), it is important to consciously develop an explicit price perspective. This perspective should include, at least, a contextual level, or underlying price bias, that facilitates the setting of the overall strategic trading policy (i.e., only establish core positions that benefit from a price move in the direction of the underlying bias), and an operational level that influences tactical adjustments to maintain the core position's suitability (e.g., utilize extreme impulsive moves at the operational level to reduce core positions, and utilize corrective swings at the operational level to add to core positions). Given different objectives and trading styles, the contextual and operational swing levels will vary for each portfolio manager or risk manager depending on your time horizons and price movement tolerances. For example:
   • Commercial producers and end-users would probably use the Major swing level as the contextual level for determining the underlying price bias, and the Intermediate and Minor level(s) as the operational level(s) for tactical adjustments.
   • Trading desks, given that shorter time horizons and smaller price moves tend to dominate their activity, would probably use the Intermediate (and possible the Minor) swing level(s) as the contextual level for determining the underlying price bias, and the Minute and intraday swings as the operational level(s) for tactical adjustments.
3. Because of the difficulty of attempting to forecast future events (implication (1) above), it is imperative that, in the event a strategy has an unlimited risk component or dimension, an offsetting limited risk component be developed and implemented as the first leg of the strategy.
4. Clearly, there is not a single strategy that is suitable for all phases and swings of the price movement cycle.
5. Price movement is a series of related events, not an isolated event. Therefore, to ensure suitable to the market price environment, strategies and tactics need to be developed and implemented as a series of related events, not as isolated events.
   

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For now, there are two main performance profiles and related strategies and tactical adjustments with which we will concern ourselves:

1. Producers, marketers, and traders with net long "as is" performance profiles.
2. End-users, marketers, and traders with net short "as is" performance profiles.

As time allows, we will be developing a series of profiles for speculators. As you can imagine, a speculator will tend to either have a flat "as is" performance profile, since there is no current position at risk, or is desirous of increasing the exposure inherent in an existing net long or net short "as is" performance profile. Therefore, any position established will be speculative and strictly market perspective driven. For now, refer to the individual position performance profiles under Producers if you are establishing speculative positions to benefit from declining prices, and End-users if you are establishing speculative positions to benefit from rising prices.

1. It is too late to develop suitable strategies and tactics in the midst of adversity - stress has already caused the brain's synapse to start to malfunction.
2. There is no amount of anxious and wishful thinking that can alter or control the course of a given market. However, the energy levels typically dissipated by anxious and wishful thinking, when constructively applied to developing suitable strategies and tactics, beforehand, can introduce enough flexibility to enable profitable adaptation to unforeseen events that are beyond our individual control.

Tie the price perspective together with "as is" performance profile. From most aggressive to least aggressive within each phase of the idealized price movement cycle.

For a more in depth application to your specific situation, please click the Comments button or email us.