Energy Sector Trading Strategy: Rules, Backtest, and Practical Example

Energy sector trading is the process of gaining exposure to multiple stocks in the energy sector as a means of diversification and generating profits. Investment can be done by buying an ETF that tracks the sector or by building a portfolio of energy stocks.

If you want to trade energy stocks for short-term trading, the most likely option is to trade the stocks themselves or to trade the ETF with the ticker code XLE. In this article, we provide you with two energy sector trading strategies (XLE trading strategy).

If you want to read more about ETFs we recommend this old article:

What is the S&P Energy sector?

The S&P 500 energy sector comprises stocks in the energy sector that are in the main index (S&P 500). Those are stocks of companies that do business in the oil and natural gas industry, including oil and gas exploration, refining, and distribution of products. It also includes the related businesses that provide equipment, materials, and services to oil and gas producers.

Vanguard Energy ETF (VDE) and Energy Select Sector SPDR Fund (XLE) are the major ETFs that track the energy sector. And looking at their performance over the past couple of months, the sector has beaten the broader market with a one-year total return as high as 52.81% as compared to the S&P 500 index which has a net return of about -9.28% as of 18th July 2022.

The performance difference is exactly why you might want to trade the energy sector: it offers diversification. When you are both investing long term or trading short term you want to have assets that don’t move in tandem. The more they move independently of each other, the better. Please read more about this in our other articles about the subject:

What are the 5 biggest stocks in the sector?

The 5 biggest stocks in the S&P 500 energy sector include:

  • Exxon Mobil Corporation (XOM): The company is a world leader in the energy sector and one of the largest publicly traded stocks. The company produces a variety of products to meet the needs of customers such as Butyl, Polymer modifiers, polypropylene, solvents, fluids, etc. XOM, as of July 18, 2022, has a total market capitalization of $356.1B with a year-to-date (YTD) return of 33.05%, outperforming the S&P 500 index which is currently struggling.
  • Chevron Corporation (CVX): This is a multinational company that engages in petroleum operations, such as exploration, production, and refining. Their products include lubricants like Texaco and Caltex which are recognized worldwide. CVX as of July 18, 2022, has a total market capitalization of $270.46B with a YTD return of 18.39% which outperforms the broader market.
  • ConocoPhillips (COP): The company explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids worldwide. It primarily engages in the conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations in North America, Europe, Asia, and Australia. The company has a market cap of $117.330 billion as of July 2022.
  • EOG Resources, Inc. (EOG): The company, together with its subsidiaries, engages in oil and gas exploration, development, production, and marketing of crude oil. Its principal producing areas are in New Mexico and Texas in the United States, as well as the Republic of Trinidad and Tobago. Its market cap as of July 20, 2022, is $61.834 billion.
  • Schlumberger Limited (SLB): The company provides technology for the energy industry worldwide, offering software, information management, and IT infrastructure services. It provides consulting services for reservoir characterization, field development planning, and production enhancement, as well as petro technical data services and training solutions, reservoir interpretation and data processing servic