Copper Trading Strategy (Rules, Python, Backtest, Performance, Statistics)
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).
But before you start trading copper, here is what you should know.
Copper is a volatile commodity
Before we go on to backtest copper trading strategies, let’s look at the price action of the futures contract for copper:
As you can see, copper moves wide and suddenly in both directions. This makes copper a bit tricky to trade, and finding a copper trading strategy is difficult.
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 used for manufacturing, and it doesn’t create any value, like stocks, for example. Furthermore, all commodities are heavily influenced by macro news, which is notoriously difficult to predict, perhaps impossible.
Anyway, we have one copper trading strategy for you:
Copper trading strategy – backtest, data, and statistics
We make the following trading rules:
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These simple trading rules returned the following equity curve when we backtested using the HG=F ticker symbol data in Yahoo Finance (we recommend using a more reliable data provider like Norgate):
The x-axis shows the number of trades. It’s surprisingly many trades, and we got the following trading performance metrics:
- No. of trades: 223
- Time spent in the market: 19.14%
- CAGR (annual return): 7.14%
- Win rate: 67.7%
- Average win: 2.41%
- Average loss: 2.63%
- Max drawdown: 22.65%
We also made a strategy optimization to find out how robust the copper trading strategy is:
The robustness indicates that the strategy has held up well for any length of the average we put in.
Copper trading strategy – complete Python code
Here is the complete Python code for the copper trading strategy we did:
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.
FAQ:
What role does copper play in indicating global economic health?
Copper is widely used as an indicator of global economic well-being due to its diverse applications across industries. It is particularly sensitive to economic growth and is considered a popular commodity for traders monitoring economic indicators. Copper, a malleable red-colored metal, finds applications in various industrial manufacturing processes. It is commonly used in everyday items such as microwaves and heating systems, with significant demand in building construction, transportation equipment, and electronic products.
How does copper trading relate to global economic growth?
Given its wide range of uses, copper is often regarded as an indicator of global economic growth. Traders frequently monitor copper prices to gauge the health of the global economy, making it a popular commodity for those interested in economic trends. Like silver and gold, copper exhibits excellent conductivity of electricity and heat. This property makes copper highly valuable and contributes to its widespread use in technology.
What factors influence the price movements of copper in the market?
Copper prices are influenced by various factors, including global economic growth, demand from emerging market economies like China and India, supply disruptions, the US housing market, and the availability of substitute metals. Economic growth is a pivotal factor, and traders must consider these dynamics in their analysis. Copper CFDs are highly leveraged products, meaning traders put down only a fraction of the full value of the position. While this offers the potential for increased profits, it also magnifies losses if predictions are incorrect. Traders should be mindful of the risks associated with leverage.