Can technical trading strategies in the European natural gas market outperform a buy and hold strategy?

Abstract

Technical analysis is the study of past market history to determine future direction and is a common tool for investors to include in a strategy when trading stocks, futures, and other financial assets. Studies have shown that some technical trading strategies are able to outperform a buy and hold strategy on various financial assets like stocks and foreign exchange futures, but no studies have been done regarding technical trading strategies in the European gas market. Trading of natural gas in Europe has been liberalized in the past 10 years or so, and the volume of futures and forward contracts have increased dramatically, making it possible to efficiently buy and sell these contracts in a liquid market. It might be because the European natural gas market has changed in later years, that there are not any significant research available that have studied the viability of technical trading strategies, and so our paper provides valuable information about their performance in the European natural gas market. Through this paper we have backtested several different moving average crossover strategies, and analyzed their returns, risk, and overall performance, before comparing these results to that of a buy and hold strategy, to find out how these strategies perform. We have tested a total of 80 different moving average crossover strategies, in three different natural gas hubs, providing 240 sets of results. Out of the 240 results, 41,25% had a higher return than a buy and hold strategy, 60% had lower risk, and 42,92% provided a better Sharpe ratio. These results show that a significant amount of moving average crossover strategies provide excess return and lower risk than a buy and hold strategy, and so technical trading strategies in the European natural gas market are certainly worth looking into.