Cotton Trading Strategy – Backtest and Futures Trading Example

For more than 7000 years, cotton has been one of the raw materials used in the production of textiles and other fiber-requiring materials including fishnets and gunpowder. In fact, its use continues to increase and now accounts for over 35% of all the fiber used around the world. This makes cotton a multibillion-dollar market, and most of that is via cotton futures. Considering a cotton futures strategy?

A cotton futures strategy is the methodology or technique you can use to profitably trade the cotton futures market and often includes technical and fundamental analyses. Cotton futures are financial derivative products that represent a contract to buy or sell a specified quantity of cotton on a future date, at a pre-agreed price. The contract trades on both ICE and NYMEX. You can use a cotton futures strategy to speculate or hedge the price of cotton.

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

Cotton Trading Strategy – Rules, Backtest, Returns, Performance

Let’s go straight to a cotton trading strategy. The backtest is done on data from Yahoo Finance: CT=F. This is a short trading strategy.

These are the trading rules (members can unlock the trading rules and get trading rules for hundreds of trading strategies):

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Here is the equity curve:

Statistics, facts, and trading performance:

• Total Trades: 68
• Time Spent In The Market: 6.73%
• CAGR: 3.31%
• Risk-adjusted return: 49.18%
• Win Rate: 57.35%
• Average Win: 4.06%
• Average Loss: -2.53%
• Max Drawdown: -15.22%

Cotton trading strategy – Python code

For your convenience, we have provided the complete Python code:

What are Cotton futures?

Cotton futures are futures contracts in which the underlying asset is cotton. 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 cotton futures, the contract unit is 50,000 pounds of cotton; however, the contract can be financially settled or deliverable.

Cotton 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 cotton.

What is a Cotton futures strategy?

A cotton futures strategy is a set of methodologies and techniques for profitably trading cotton futures. It includes fundamental and technical analysis strategies for market timing, as well as position sizing and risk management techniques.

If you want to trade futures successfully, you must have a solid trading strategy. Your cotton futures strategy must include precise entry and exit signals, as well as risk management techniques.

Cotton futures strategy backtest

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

What is the seasonality of Cotton futures?

Seasonality in the financial markets refers to the tendency of an asset’s price to move in a fairly predictable manner during certain periods of the year, which can months or seasons like winter and summer.

From the chart below, cotton futures tend to perform better during the winter and spring months than during the months of the summer and fall seasons.

What moves the Cotton — What affects the Cotton the most?

Cotton futures trading can be significantly impacted by the United States, India, and China, which are all responsible for the production of over 65% of all the cotton used around the world. Reduced output from these countries can lead to scarcity and an increase in cotton prices.

Other factors that affect the prices of cotton include:

• The price of substitute fabrics
• The demand for cotton-based products
• Energy prices
• China’s stockpiling policy

How are Cotton futures traded?

Cotton futures are traded on the Intercontinental Exchange (ICE) in London. The contract also trades 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.

On both exchanges, one contract unit is equivalent to 50,000 pounds of cotton, and contracts expire in the months of March, May, July, October, and December. Price quotations are in USD on the CME platform and in US cents on ICE.

Trading terminates seventeen business days from the end of the spot month at ICE Futures US. The contract is financially settled on the CME platform but deliverable on ICE.

How do you start trading Cotton futures?

You need a futures broker that would grant you access to the exchanges where cotton futures contracts are traded and help clear your trades. So, the first thing to start trading cotton futures is to 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 deposit the initial margin or a little more than that.

If you just want to speculate on price fluctuations, you may want to trade the cotton CFDs that track cotton futures. 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. CFD brokers, like IG, offer cotton futures CFD.

What is Cotton trading at?

Cotton futures were trading at $0.8018 per pound as of November 25, 2022.

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

What’s Cotton futures hour?

On the CME Globex electronic platform (from NYMEX), cotton futures (TT) trades Sundays to Fridays, from 6:00 p.m. to 5:00 p.m. ET (New York Time) the next day. There is a 1-hour break before the start of the next trading day (5:00 p.m. – 6:00 p.m. ET) from Monday to Thursday.

On the ICE futures exchange, cotton futures (CT) trades from 2:00 AM – 7:20 PM London Time every trading day, and there is a pre-Open market from 12:30 AM and a post-Close market.

Where can I find trading charts?

The chart is available on any trading platform that provides chart services. If your platform does provide charts, you can use TradingView, which provides free access to the charts of various instruments. However, to connect TradingView to your broker, you must subscribe to its Pro services. From the CME platform, you can also access the TradingView chart.

Also, Yahoo Finance and YCharts are two other sites where you can find cotton futures charts. You can also subscribe to trading charts through a third-party platform like MultiCharts.

What are the trading symbols for Cotton futures?

The trading symbol for cotton futures on ICE Futures US is CT, while the trading symbol for cotton futures on CME’s Globex platform is TT.

What is the specification for the Cotton futures contract?

One contract unit of cotton is equivalent to 50,000 pounds of cotton on both ICE Futures US and the CME platform. The price quotation is in US dollars per pound on CME and US cents and hundredths of a cent per pound on ICE. The minimum price fluctuation is 1/100 of a cent ($0.0001) per pound, which is equivalent to $5.00 per contract.

Contracts expire in the months of March, May, July, October, and December, and they are financially settled on the CME platform but deliverable on ICE. Trading terminates seventeen business days from the end of the spot month at ICE Futures US.

Why should you start trading Cotton futures?

There are many reasons to trade cotton futures contracts. Here are some of them:

• You can use it to hedge against price changes if you are a cotton farmer
• You can use it to ensure a stable supply of cotton if you run a textile factory
• Being a commodity futures product, cotton futures can be used to hedge against inflation
• As an investor, you can use it to diversify your investment portfolio
• As a trader, you can use it to speculate on cotton prices and profit from the price fluctuations

What is the contract size?

A contract unit of cotton futures is equivalent to 50,000 pounds of cotton on both CME and ICE exchanges. The dollar worth of a contract depends on the current price of cotton. For example, if the price of cotton is $0.8018 (as it is as of writing), the USD worth of a full contract unit would be 50,000 x $0.8018 = $40,090.

What is the tick size?

One contract of cotton futures has a tick size of $5.00 per tick per contract.

What is the minimum price fluctuation for Cotton futures?

The minimum price fluctuation is 1/100 of a cent or $0.0001 per pound.

Are there any ETFs?

The ETF that tracks the cotton futures market is iPath Series B Bloomberg Cotton Subindex Total Return ETN (BAL). The fund tracks the performance of a future-based index, thereby providing exposure to cotton futures prices.

What factors affect Cotton prices?

Many factors can affect cotton prices. These are a few of them:

• China’s cotton policy: As the biggest consumer of cotton, China can affect the cotton market through their policies. When China is stockpiling cotton, the prices go up, and when they sell their stockpiles, cotton prices decline.
• The price of substitute fabrics: Increasing prices of substitute fabric will increase the demand for cotton and push cotton prices up, while decreasing prices of substitutes will drag the price for cotton futures lower.
• The demand for cotton-based products: When there is an increasing demand for cotton and cotton-based products, the price of cotton futures rises. Likewise, when the demand for cotton products decreases, cotton futures prices fall.
• Energy prices: Commercial production of cotton is energy-intensive. Increasing prices of crude oil will increase the cost of cotton production.
• Domestic policies: Subsidies can lower the price of the commodity, while a ban on importation can increase prices.

What is the all-time high for Cotton futures?

According to the TradingView chart for the ICE cotton futures (CT), the all-time high for cotton futures is 219.70 US cents ($2.197). This price was reached in March 2011.

What are the biggest risks in trading Cotton futures?

The most significant risk in trading cotton futures is adverse price movement. Because it is a leveraged contract, losses are calculated using the contract size traded rather than the margin deposited. So, if you trade with a 10x leverage, for example, a 1% negative price movement results in a 10% loss in your account, and a 10% negative price movement would wipe out your entire account.

Another major risk is a lack of liquidity. Because there are few retail traders in the cotton futures market, the market is not as liquid as gold or crude oil. As a result, it may be difficult to find someone to take the other side of your trade when you want to exit your position. Also, the spread may be substantial.

What is the settlement method?

This varies with the exchange. The cotton contract is financially settled on the CME platform (NYMEX), whereas settlement on ICE is by physical delivery.

What is the settlement procedure?

On the CME platform, cotton futures (TT) are cash settled upon expiration — CME Group staff determines the settlement of the expiring cotton (TT) contract by following the regular daily settlement procedure.

On ICE Futures US, the exchange supervises the delivery and quality of the cotton. It must be of US origin and quality: Strict Low Middling Staple Length: 1 2/32nd inc. Delivery locations include Galveston, TX, Houston, TX, Dallas/Ft. Worth, TX, Memphis, TN, and Greenville/Spartanburg, SC.

What is the block minimum for Cotton futures?

100 contracts

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

Unlike cotton futures which trade on regulated futures exchanges, cotton CFDs are simply agreements to exchange the price difference between the time a trade is opened and the time it is closed. With a CFD, you are at the mercy of the CFD broker. However, CFDs can be traded indefinitely without worrying about contract expiration or delivery as is the case with futures contracts.

Which forex instrument is the same as Cotton futures

Cotton CFDs

What are some important dates for this market?

These are a few of the important dates for the cotton futures market:

• 1870 when cotton futures contracts were introduced
• 1984 when options on cotton futures were introduced
• March 2011 when the cotton market made its all-time high of 219.70 US cents ($2.197)

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

From TradingView’s chart for the ICE cotton futures (CT), the highest price cotton has ever reached was 219.70 US cents ($2.197), which happened in March 2011.

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

Based on TradingView’s chart for the ICE cotton futures (CT), which goes as far as August 1972, the lowest price cotton has ever traded was 26.44 US cents in August 1972. This is where the chart started, and thus, may not be the actual all-t-me low.

FAQ:

What is a cotton futures strategy, and why is it essential for successful trading?

Gain insights into the methodologies and techniques comprising a cotton futures strategy. Understand the importance of technical and fundamental analyses, along with risk management, for profitable trading in the cotton futures market.

What is the seasonality of cotton futures, and how can it influence trading decisions?

Understand the seasonal patterns of cotton futures, particularly the tendency to perform better during certain months. Use this information for informed trading decisions based on historical trends.

How are cotton futures traded, and what are the key details about their contracts on ICE and NYMEX?

Gain insights into the logistics of trading cotton futures on ICE and NYMEX, including contract specifications, symbols, and settlement methods. Understand the differences between financially settled and deliverable contracts.