Copper Trading Strategy — What Is It? (Backtest)

Last Updated on October 5, 2022

Given its wide range of uses, copper is commonly used as an indicator of global economic health. If you want to trade this popular commodity, it’s important to learn how copper is traded and choose the right copper trading strategy for you.

Copper is one of the most popular industrial metal commodities to trade, and there are different ways to trade it. You can trade the copper market through futures, options, and CFDs. You can also gain exposure to the copper market by trading copper stocks or ETFs (exchange-traded funds) like CPER (the United States Copper Index Fund) or JJCB (iPath Series B Bloomberg Copper Subindex Total Return ETN).

At the end of the article, we present a copper trading strategy (with backtest). Before you start trading copper, here is what you should know.

What is copper?

Believed to be the first metal to be used by humans, copper is a red-colored metal that is malleable and has some interesting properties. Today, copper has a wide range of applications in industrial manufacturing, and everyday items, including microwaves and heating systems. However, it derives most of its demand from building construction, transportation equipment, and electronic products.

Just like silver and gold, copper is a strong conductor of electricity and heat, which makes it extremely useful and is one of the reasons it trades in high volumes – a good thing for traders because it can lead to reduced spreads and potentially cleaner chart patterns. But unlike precious metals, copper is available in greater quantities and is cheaper.

Copper is not considered valuable enough to be used for currencies, it has played a key role in technology for thousands of years and continues to do so in today’s industrial expansion. Its wide range of uses. Given its wide range of uses, copper is commonly used as an indicator of global economic growth, so it is a popular commodity to trade.

Copper trading — definition

This refers to trading copper on the commodity market or equity market either to make some profits or to hedge against risks. Stakeholders in the copper industry, such as miners, producers, and various industry users trade copper to hedge against risk, while speculators trade the commodity to benefit from its price movements.

The price movements of copper depend on many factors, such as global economic growth, the demand from emerging market economies like China and India, supply disruptions, the US housing market, and the availability of substitute metals. However, the most important factor is global economic growth. In fact, the price of copper is often used as a benchmark for ascertaining the health of the global economy.

Closely related to that is the demand from emerging economies — during periods of economic growth, these nations demand large quantities of copper, which causes the price to surge. On the other hand, during economic downturns, demand for copper drops, and the price falls. Anyone who wants to trade copper should be aware of this dynamic.

This is why many copper traders combine technical analysis with the analysis of macroeconomic factors to inform their trading strategy when trying to forecast whether the price of copper will rise or fall. One has to be confident in their forecast to be able to trade copper profitably. A good trading strategy should be able to help the trader manage their risk, identify buy and sell signals in the market, and set reasonable take-profit and stop-loss levels with aim of positive reward/risk ratios.

How can you trade copper?

You can trade copper through a futures broker, a stockbroker, or a CFD broker. Let’s take a look at each of them.

Trading via a futures broker

The most popular way to trade copper is via a futures broker, which offers you access to the commodity markets where you can trade both copper futures and options. To trade with a futures broker, you have to open an account with the commodity exchange through the futures broker.

The ticker code for copper futures is HG and its traded on several exchanges (more later).

Trading via a stockbroker

Instead of trading commodity futures, you could opt to trade stocks of companies that are involved in copper mining and production. Alternatively, you can trade an ETF that tracks the price of copper futures contracts, such as the WisdomTree Copper, or a mining stock ETF, such as the Global X Copper Miners ETF.

Trading via a CFD broker

If you just want to profit from the price movement of copper, you can trade copper CFDs via a CFD broker. A CFD is an agreement to exchange the difference in the price of the asset from when the position is opened to when it is closed. Your profit or loss to your CFD positions will depend on how far the market moves in your predicted direction or against the direction — if the price moves in your direction, your trade could make a profit, otherwise, you will make a loss.

CFDs are highly leveraged products, which means that you put down only a fraction of the full value of your position in order to gain full market exposure. While this can help you make more money if your prediction is correct, it can magnify your losses if your prediction is incorrect.

Which broker to use for copper trading?

Some brokers have access to all of the above products. Interactive Brokers is one such broker. We have been using Interactive Brokers (IB) for 20 years, and we can recommend them (we have no affiliation wit them). They have its pros and cons:

We have also made a script that lets you trade automatically with Amibroker and IB:

What market is copper traded on?

Copper is primarily traded on the commodity market, which can be a spot market where the commodity is traded and delivered on the spot or a futures market where the commodity is delivered on a future date. In the spot market, you buy or sell copper bullion bars directly from metal exchanges and take delivery immediately.

But commodity futures market is the most popular place to trade copper. If you trade copper — whether through a futures broker or a CFD broker — you are likely partaking in the copper futures market A copper futures contract represents an agreement to exchange an amount of copper at a predetermined price on a specific date.

There are different commodity exchanges where copper is traded. Notable examples include

  • The Commodity Exchange Inc. (COMEX), which is now a division of the New York Mercantile Exchange.
  • The London Metal Exchange (LME).
  • The Mumbai-based Multi Commodity Exchange (MCX)

Copper-related assets are traded on equity markets, such as the New York Stock Exchange where many copper mining stocks and ETFs are traded.

Copper is a volatile commodity asset

Before we go on to backtest copper trading strategies, let’s look at the price action over the last 20 years:

Copper price charts (futures)
Copper price charts (futures)

As you can see, copper has wide and sudden moves, both directions. This makes copper a bit tricky to trade:

Copper trading strategy

Commodity trading strategies require a different mindset compared to stock trading. And, to be frank, it’s a lot trickier to find good and robust copper trading strategies compared to stocks.

Why is that?

Most likely it’s because copper is a metal that is used for manufacturing, and the metal doesn’t create any value, like stocks for example. Furthermore, all commodities are heavily influenced by macro news, and macro news is notoriously difficult to predict, perhaps impossible.

Copper trading strategy no 1

Let’s do some backtesting based on copper futures (HG).

The first backtest we do is based on a trend following strategy:

When the close breaks above the 200-day moving average, we go long at the close. When the close breaks under the 200-day moving average, we go short at the close. We are constantly in the market, either long or short. The 200-day moving average strategy is the “ultimate” trend following strategy and often work as a defensive filter. Does this simple copper trading strategy work?

The equity curve looks like this:

Copper trading strategy (200-day moving average)
Copper trading strategy (200-day moving average)

Not pretty! We did a strategy optimization and it seems any moving average strategy performs bad in copper futures no matter what.

 

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