Cocoa Futures Strategy (Backtest)

Last Updated on November 28, 2022

Once used as a form of currency in Central and South America before the Spanish conquest, cocoa is now used to produce chocolate and some of the most popular beverages in the world. Cocoa belongs to the soft commodity category, and it commands a multibillion-dollar industry. With cocoa futures representing the benchmark for the world cocoa market, let’s explore the cocoa futures strategy.

Cocoa futures are financial derivative products that represent a contract to buy or sell a specified quantity of cocoa on a future date, at a pre-agreed price. The contract trades on both ICE and the CME Globex platform (NYMEX). A cocoa futures strategy is the methodology or technique you can use to profitably trade the cocoa futures market and would include technical and fundamental analyses. It can be used to speculate or hedge the price of cocoa.

In this post, we answer some questions about the Cocoa futures strategy, and we make a backtest of a strategy.

What are Cocoa futures?

Cocoa futures refer to futures contracts whose underlying asset is cocoa. A futures contract is a standardized, exchange-traded contract in which the seller agrees to deliver the specified quantity of the underlying asset on a future date, at an already agreed price.

In the case of cocoa futures, the contract unit is 10 metric tons, but the contract can be financially settled or deliverable. Cocoa futures trade on NYMEX, a member of the CME Group, where the contract is financially settled. It also trades on ICE, where settlement is by physical delivery of cocoa.

What is a Cocoa futures strategy?

A cocoa futures strategy refers to the methodologies and techniques for trading cocoa futures profitably. It includes fundamental and technical analysis strategies a trader uses for market timing, as well as their techniques for position sizing and risk management.

It is important to have a robust trading strategy if you want to trade futures with any success. Your cocoa futures strategy must have precise entry and exit signals and risk management methods.

Cocoa futures strategy backtest

A backtest with strict trading rules, settings, statistics, and historical performance is coming soon.

What is the seasonality of Cocoa futures?

In financial trading, seasonality refers to the tendency of an asset’s price to move in a fairly predictable manner during certain periods of the year, such as months or seasons like winter and summer.

Cocoa futures tend to perform better during the summer months than any other period of the year. The contracts tend to do poorly in spring and fall, as you can see in the chart below:

Cocoa futures strategy
Source: Seasonalcharts.com

What moves the Cocoa What affects the Cocoa the most?

The price of cocoa is moved by factors that affect its supply and demand, such as the following:

  • Weather conditions: Grown in tropical rainforest regions, cocoa pods require the right mix of rainfall and sunshine to ripen. As such, adverse weather conditions in the west African countries where it is produced can affect global cocoa supply and push prices up.
  • Labor issues: Strike actions in the top-producing nations, like Ivory Coast, can affect cocoa production and supply.
  • Local politics: Political events, such as elections, in the top-producing nations can affect cocoa prices. Also, many of the top producers are in West African countries where there can be political crises like coups and tribal wars that can affect cocoa production and export.
  • Crop diseases: Plant diseases can have a severe impact on the harvest. For instance, the ‘Black Pod’ disease in 2010 resulted in the loss of half a million tonnes of cocoa.
  • Health reports: Reports about the benefits of cocoa can boost consumption, which can lead to more demand and higher prices.

How are Cocoa futures traded?

Cocoa futures are traded on the New York Mercantile Exchange (NYMEX), which is a member of the CME Group, so it can be traded from anywhere via CME’s Globex electronic platform. The contract also trades on the Intercontinental Exchange (ICE) in London.

On both exchanges, cocoa futures contracts expire in the months of March, May, July, September, and December. One contract unit is equivalent to 10 metric tons of cocoa, and it is financially settled on the CME platform but deliverable on ICE. Trading terminates on the day immediately preceding the last notice day (which is ten business days prior to the last business day of the delivery month) at ICE Futures U.S.

How do you start trading Cocoa futures?

You trade the contract through a futures broker, which grants you access to the exchanges where cocoa futures contracts are traded. To get started, register with a futures broker and fund your account. Since futures contracts are leveraged instruments, you need not have the full dollar worth of the contract before you can trade it.

You may also trade the CFD of cocoa futures via a CFD broker like IG. With a CFD contract, you are in an agreement with the broker to exchange the price difference between the opening and closing of a trade.

What is Cocoa trading at?

As of November 25, 2022, cocoa futures were trading at $2484 per metric ton.

Since the price changes from time to time, what is quoted here may not be the price it’s trading when you are reading this post. To get the real-time price on the CME platform or directly from TradingView, click either of those links.

What’s Cocoa futures hour?

On the ICE futures exchange, cocoa futures (CC) trades from 9:15 AM – 6:30 PM London Time every trading day, and there is a pre-Open market from 1:00 AM and a post-Close market from 7:00 PM to 1:00 AM the next day. The corresponding time for New York and Singapore also apply.

On the CME Globex electronic platform, cocoa futures (CJ) trades Sundays to Fridays, from 6:00 p.m. to 5:00 p.m. ET (New York Time) the next day. There is a 60-minute break before the start of the next trading day (5:00 p.m. – 6:00 p.m. ET) from Monday to Thursday.

Where can I find trading charts?

You can get the chart on any trading platform that offers chart services. If your platform does offer charts, you can subscribe to trading charts via a third-party platform, such as MultiCharts. You can also use TradingView, which offers free access to charts of different instruments. But to connect to your broker, you have to subscribe to the Pro services.

Other sources of cocoa futures charts include Yahoo Finance and YCharts.

What are the trading symbols for Cocoa futures?

The trading symbol for cocoa futures on ICE Futures US is CC, while the trading symbol for cocoa futures on CME’s Globex platform is CJ.

What is the specification for the Cocoa futures contract?

On both ICE Futures US and NYMEX, one contract unit of cocoa is equivalent to 10 metric tons of cocoa. The price quotation is in US dollars and cents per metric ton, and the minimum fluctuation is $1.00/metric ton, which is equivalent to $10.00 per contract.

Contracts expire in the months of March, May, July, September, and December, and they are financially settled on the CME platform but deliverable on ICE. Trading terminates on the day immediately preceding the last notice day (which is ten business days prior to the last business day of the delivery month) at ICE Futures U.S.

Why should you start trading Cocoa futures?

There are many reasons to trade cocoa futures. One of them is to hedge inflation or hedge against market risks if you are in the cocoa industry. Another reason is to diversify your investment portfolio into the commodity market. For us traders, the main reason is to speculate on cocoa prices and try to profit from the price fluctuations. You can also attempt arbitrage trading between two exchanges.

What is the contract size?

One contract unit of cocoa futures is equivalent to 10 metric tons of cocoa on both CME and ICE exchanges. The dollar worth of a contract depends on the current price of the commodity. For example, the price of cocoa, as of writing, is $2484 per metric ton, so the USD worth of a full contract unit of cocoa would be 10 x $2484 = $24,840.

What is the tick size?

The tick size of one full contract of cocoa futures is $10.00 per tick per contract.

What is the minimum price fluctuation for Cocoa futures?

The minimum price fluctuation is $1.00 per metric ton.

Are there any ETFs?

Yes, there is an ETF that offers pure-play exposure to cocoa prices — iPath Bloomberg Cocoa Subindex Total Return ETN (NIB). The fund tracks an index of cocoa futures contracts, offering you exposure to the cocoa market. It reflects the performance of cocoa futures contracts with three different expiration dates.

What factors affect Cocoa prices?

There are so many factors that can affect the prices of cocoa. Here are a few of them:

  • Weather conditions in West African countries that are the top producers of cocoa, especially Ivory Coast.
  • The political situation in those countries, including elections, coups, and tribal disputes.
  • Changes in consumer preferences and health reports about the benefits of dark chocolate.
  • Key industry reports, such as the Global Cocoa Market Report, ICCO Monthly Review, and ICCO Annual Reports

What is the all-time high for Cocoa futures?

According to over 60-year data from Trading Economics, the all-time high for cocoa futures is $5379.00, which it achieved in July 1977. But the cocoa futures chart on TradingView started from December 1979, and the highest cocoa has attained since then is $3775.00, which happened in March 2011.

What are the biggest risks in trading Cocoa futures?

When trading cocoa futures, the biggest risk comes from adverse price movement. Since it is a leveraged contract, losses are calculated using the actual value of the contract size traded, and not the margin deposited. So, if you trade with a 20x leverage, a 1% negative movement results in a 20% loss in your account, and a 5% adverse price move would wipe out your account completely.

Another big risk is liquidity. The cocoa market is not as liquid as gold or crude oil, as there are not many retail traders in the market. So, you may not easily find someone to take the other side of your trade when you want to exit your position, and the spread can be huge.

What is the settlement method?

It depends on the exchange. On the CME Globex platform, cocoa futures (CJ) contracts are financially settled, but on ICE Futures US, cocoa futures (CC) are settled by physical delivery.

What is the settlement procedure?

On ICE Futures US, the exchange supervises the delivery and quality of the commodity. The last notice day is 10 business days prior to the last business day of the delivery month. Delivery locations include licensed warehouses in the Port of New York District, Delaware River Port District, Port of Hampton Roads, Port of Albany, and Port of Baltimore.

On the CME Globex platform, cocoa futures are financially settled on expiration. CME Group staff determines the settlement of the expiring Cocoa (CJ) contract by following the regular daily settlement procedure.

What is the block minimum for Cocoa futures?

100 contracts

What is the difference between Cocoa futures and the Forex instrument for Cocoa?

While cocoa futures trade on regulated futures exchanges, cocoa CFDs, offered by online CFD brokers, are mere agreements to exchange the price difference between the time a trade is opened and the time it is closed. With CFDs, you are at the mercy of the CFD broker.

Nonetheless, cocoa futures have expiry dates and may involve the delivery of cocoa, while the CFD can be traded without such worries.

Which forex instrument is the same as Cocoa futures

Cocoa CFD

What are some important dates for this market?

Some of the important dates for the cocoa futures market include:

  • 1925 when cocoa futures contracts were introduced
  • 1997 when options on cocoa futures were introduced
  • July 1977 when the cocoa market made its all-time high of $5379

What is the highest Cocoa has ever been its all-time high?

According to over 60-year data from Trading Economics, the highest cocoa has ever reached was $5379.00, which happened in July 1977.

What is the lowest Cocoa has ever been its all-time low?

Based on TradingView’s chart for cocoa futures (CC), the lowest cocoa has ever fallen since 1979 was $707.00, which happened in December 2000.

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