Hard Red Winter Wheat Trading Strategy

Hard Red Winter Wheat (KW) Trading Strategy – Rules, Backtest, Performance

Hard Red Winter Wheat trading strategy refers to the methodologies and techniques you can use to trade Hard Red Winter Wheat futures contracts profitably. Hard Red Winter (HRW) wheat futures are contracts to receive or deliver the specified quantity of HRW wheat on a future date, at a pre-agreed price. The contract trades on the CME Globex platform and is settled by the physical delivery of the specified quantity and quality of HRW wheat.

Soft commodity futures, such as wheat futures, can offer an array of hedging and speculative opportunities, and the Hard Red Winter Wheat (KW) futures is one of the actively traded wheat contracts. To trade this contract successfully, you must use the right strategy. What is your Hard Red Winter Wheat (KW) futures trading strategy?

In this post, we answer some questions about the Hard Red Winter Wheat (KW) futures trading strategy. To show you how you potentially can make money in the futures contract, we make a backtest of a potential strategy.

Table of contents:

What are Hard Red Winter Wheat (KW) futures?

Hard Red Winter Wheat (KW) futures are the largest of the U.S. wheat crops, and it’s the type mostly grown by Kansas farmers. It has high protein and gluten content, and is primarily used for making yeast bread and rolls. It can also be used in making other flour-based products, as well as a substitute for livestock feed. Due to its usefulness, the HRW wheat futures are heavily traded on commodity exchanges.

HRW wheat futures are financial derivative contracts that represent an agreement to receive or deliver the specified quantity of HRW wheat on a future date, at a pre-agreed price. The contract trades on KCBT, which is a part of the CME Group, so it can be traded via the Globex electronic platform.

At contract expiry, the seller of the HRW wheat futures contract delivers the specified quantity and quality of HRW wheat to the buyer through the exchange. But traders who just want to speculate on the HRW wheat price without getting involved in the delivery can close out their trades before expiry or roll over their contracts.

What is a Hard Red Winter Wheat (KW) futures strategy?

An Hard Red Winter Wheat (KW) futures strategy refers to the methodologies and techniques you can use to trade the contract profitably. This includes technical and fundamental analyses of the HRW wheat futures market for good market timing.

To succeed in trading the HRW wheat futures market, you will need a robust trading strategy that offers precise entry and exit signals. In addition, your HRW wheat futures strategy must include techniques for position sizing, risk management, and so on.

Hard Red Winter Wheat (KW) strategy backtest

Let’s look at a Har Red Winter Wheat trading strategy backtest. The backtest is performed on KC HRW Wheat Futures (KE=F ticker on Yahoo Finance). Thus, the data is dependent on the solidity of that data, but we have previously never looked at Yahoo! futures data.

The trading rules are like this:

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The trading rules returned the following equity curve:

Hard red winter wheat trading strategy
Hard red winter wheat trading strategy

The trading statistics and performance read like this:

  • The CAGR is 3.63% vs. 3.13% for buy and hold.
  • Total trades 123.
  • Win rate is a 59.34%. 
  • Average return per trade is 0.69%.
  • Average length per trade is 2.7 days.
  • Time spent in the market is 5.84%.
  • Risk-adjusted return is 62.15%.
  • Max drawdown is -6.35%

Is this a curve fitted strategy? Let’s look at other number is the parameters:

Hard red winter wheat trading rules
Hard red winter wheat trading rules

As you can see, the strategy is pretty robust for plenty of different values.

What is the seasonality of Hard Red Winter Wheat (KW) futures?

When it comes to financial market analysis, the seasonality of Hard Red Winter Wheat (KW) futures refers to the tendency of an asset’s price to move in a fairly predictable way during certain periods of the year. The periods here may refer to the months of the year or the four seasons (winter, spring, summer, and fall) of the year.

HRW wheat futures have been noted to perform better during the months of February, April, May, August, and September than during the months of January, March, June, July, October, and November. See the chart below:

Hard Red Winter Wheat (KW) futures strategy
Source: Equity Clock

What moves the Hard Red Winter Wheat (KW)?

The factors that move the Hard Red Winter Wheat (KW) market include the following:

  • Adverse weather conditions, such as drought or too much rain, in Kansas and other regions where HRW wheat is produced
  • The value of the U.S. dollar, because HRW wheat futures contracts are quoted in U.S. dollars and can be affected by a strengthening or weakening dollar
  • The release of important agricultural reports, such as these
  • the USDA Monthly Supply & Demand Report
  • Commitment of Traders
  • the USDA Prospective Planting Report
  • Spring Wheat Crop Condition
  • the Weekly Export Sales

How are Hard Red Winter Wheat (KW) futures traded?

HRW wheat futures contracts are traded on the CME Group’s KCBT, but through the Globex electronic platform, the contract can be traded from anywhere around the world. The contract trades from Sundays to Fridays, from 7:00 p.m. to 7:45 a.m. CT the next day, and Mondays to Fridays, from 8:30 a.m. to 1:20 p.m. CT.

There are monthly contracts of March, May, July, September, and December listed for 15 months. The contract size is 5,000 bushels of HRW wheat. Settlement is by physical delivery method, and trading terminates on the business day prior to the 15th day of the contract month.

How do you start trading Hard Red Winter Wheat (KW) futures?

You start trading Hard Red Winter Wheat (KW) futures through a futures broker, which would grant you access to the CME Group’s exchange where HRW wheat futures contracts are traded and help clear your trades. So, the first step is to register with a futures broker and fund your account. It may also be possible to register directly with the Globex trading platform but you need a broker to clear your trades.

If you just want to speculate on price movements, an alternative is to trade the CFD of futures contracts via an online CFD broker, such as 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. CFDs enable you to trade price fluctuations without having to worry about the rigors of asset delivery in direct futures trading.

What is the Hard Red Winter Wheat (KW) trading at?

Hard Red Winter Wheat (KW) were trading at 878’0 USX (US cents) as of December 2, 2022. See the chart here on the CME platform chart. See another chart for the continuous futures on TradingView.

Note that as the price changes from time to time, what is quoted here may not be the price it would be 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 Hard Red Winter Wheat (KW) futures hour?

Hard Red Winter Wheat (KW) futures trade on the CME Globex electronic platform from Sundays to Fridays — from 7:00 p.m. to 7:45 a.m. CT the next day, and Mondays to Fridays, from 8:30 a.m. to 1:20 p.m. CT.

For Trading at Settlement (TAS), the schedule is Sunday – Friday 7:00 p.m. – 7:45 a.m., and Monday – Friday 8:30 a.m. – 1:15 p.m. CT.

For CME ClearPort, the schedule is Sunday – Friday, 5:00 pm – 5:45 pm CT, with no reporting Monday – Thursday from 5:45 p.m. – 6:00 p.m. CT.

Where can I find trading charts?

Trading charts can be found on any trading platform that offers chart services, but if your platform does offer charts, you can subscribe to trading charts via a third-party platform, such as MultiCharts.

A better option may be to use Yahoo Finance, or better still, TradingView, which even offers free access to charts of different instruments. However, if you want to connect to your broker to TradingView, you have to subscribe to the Pro services. You can also access the TradingView chart via the CME platform.

What are the trading symbols for Hard Red Winter Wheat (KW) futures?

The trading symbols for Hard Red Winter Wheat (KW) futures is KE. The product codes for the different services are as follows:

  • CME Globex: KE
  • CME ClearPort: KW
  • Clearing: KW
  • TAS: KET

What is the specification for the Hard Red Winter Wheat (KW) futures contract?

The specification for the Hard Red Winter Wheat (KW) futures contract is equivalent to 5,000 bushels of HRW wheat. The price quotation is in U.S. cents per bushel. The minimum price fluctuation of the full contract is 1/4 of one cent (0.0025) per bushel = $12.50.

There are monthly contracts of March, May, July, September, and December listed for 15 months. The contract size is 5,000 bushels of HRW wheat. Settlement is by physical delivery method, and trading terminates on the business day prior to the 15th day of the contract month.

Why should you start trading Hard Red Winter Wheat (KW) futures?

There are many reasons to trade the Hard Red Winter Wheat (KW) futures. These are some of them:

  • If you are a wheat farmer, you would trade the contract to secure good prices ahead of harvest
  • If you use wheat in your production process, you would trade the contract to ensure a stable supply of wheat
  • As an investor, you may trade the contract to diversify your portfolio
  • As a short-term trader, you may trade to speculate on price fluctuations or benefit from spread trading

What is the contract size of Hard Red Winter Wheat (KW) futures?

The contract size of Hard Red Winter Wheat (KW) futures is equivalent to 5,000 bushels of HRW wheat. Given the current price of 878.0 US cents, as of writing, the total USD worth of one contract would be 5,000 x 878 US cents = 4,390000 US cents or 43,900 USD.

What is the tick size of Hard Red Winter Wheat (KW) futures?

The tick size of Hard Red Winter Wheat (KW) futures is $12.50 per tick per contract.

What is the minimum price fluctuation for Hard Red Winter Wheat (KW) futures?

The minimum price fluctuation for Hard Red Winter Wheat (KW) futures is 1/4 of one cent (0.0025) per bushel.

Are there any ETFs for Hard Red Winter Wheat (KW) futures?

Yes, there is one ETFs for Hard Red Winter Wheat (KW) futures that trades on the US stock exchange — Teucrium Wheat Fund (WEAT). Debuting in 2011, this fund offers pure exposure to the wheat market. The fund invests in wheat futures contracts of different maturity periods to mitigate or potentially eliminate the adverse impact of contango, which makes it useful as an inflation hedge.

What factors affect Hard Red Winter Wheat (KW) prices?

Factors that affect Hard Red Winter Wheat (KW) prices include the demand and supply of HRW wheat, such as weather conditions in the major growing regions, the value of the USD, and the availability of alternatives. Other factors are production and supply reports, such as the USDA World Agricultural Supply and Demand Estimate (WASDE) Report, the USDA Prospective Planting Report, Grain Stocks Reports, and Crop Production Reports.

What is the all-time high for Hard Red Winter Wheat (KW) futures?

Based on the TradingView chart for the HRW wheat futures, the all-time high for Hard Red Winter Wheat (KW) futures is 1395’0 US cents, which it reached in February 2008.

What are the biggest risks in trading Hard Red Winter Wheat (KW) futures?

The biggest risk when trading Hard Red Winter Wheat (KW) futures comes from adverse price movement. Since futures are leveraged instruments, the losses are calculated using the actual value of the contract size traded, not the margin deposited.

In that case, if you trade with a 20x leverage, a 1% adverse movement would lead to a 20% loss, and a 5% negative movement would result in a 100% loss in your account (wipe out your account).

What is the settlement method for Hard Red Winter Wheat (KW) futures?

The settlement method for Hard Red Winter Wheat (KW) futures is deliverable.

What is the settlement procedure for Hard Red Winter Wheat (KW) futures?

There is a normal daily settlement for Hard Red Winter Wheat (KW) futures where CME Group staff determines the daily settlements in Kansas City Hard Red Wheat (KE) futures on trading activity on CME Globex between 13:14:00 and 13:15:00 Central Time (CT), the settlement period. On contract expiry, the specified quantity of HRW wheat is physically delivered by the seller under the supervision of CME.

What is the block minimum for Hard Red Winter Wheat (KW) futures?

The block minimum for Hard Red Winter Wheat (KW) futures are:

RTH – 100

ETH/ATH – 50

What is the difference between Hard Red Winter Wheat (KW) futures and the CFD instrument for Hard Red Winter Wheat (KW)?

HRW wheat futures are standardized contracts that trade on a regulated futures exchange, whereas HRW wheat CFDs, which are offered by online CFD brokers, only try to track the price movement of the futures contracts.

With a CFD, you are in contract with the broker that offers it, and you are at its mercy. Nonetheless, HRW wheat futures have expiry dates and may involve the delivery of the wheat, but CFDs don’t come with those issues.

Which forex instrument is the same as Hard Red Winter Wheat (KW) futures?

The forex instrument that is the same as Hard Red Winter Wheat (KW) futures is HRW wheat CFD.

What are some important dates for Hard Red Winter Wheat (KW) futures?

Some important dates in the Hard Red Winter Wheat (KW) futures market include:

  • 1876 when the Kansas Board of Trade (CBOT) was incorporated for trading HRW wheat
  • 2008 when it reached its current all-time high of 1395’0 US cents
  • 2014 when HRW Wheat Short-Dated New Crop Options were introduced

What is the highest Hard Red Winter Wheat (KW) has ever been its all-time high?

Based on the TradingView chart for the HRW wheat futures, the highest price the Hard Red Winter Wheat (KW) has ever reached was 1395’0 US cents, which happened in February 2008.

What is the lowest Hard Red Winter Wheat (KW) has ever been its all-time low?

Based on the TradingView chart for the Hard Red Winter Wheat (KW) futures, the lowest price the HRW wheat futures has ever reached was 225’0 US cents, which happened in August 1977.

How are Hard Red Winter Wheat (KW) futures traded?

HRW wheat futures are traded on the CME Group’s KCBT through the Globex electronic platform. Trading occurs from Sundays to Fridays, with monthly contracts listed for 15 months.

What factors affect Hard Red Winter Wheat (KW) prices the most?

Factors include adverse weather conditions in wheat-producing regions, the value of the U.S. dollar, and the release of key agricultural reports like USDA Monthly Supply & Demand and Commitment of Traders.

What is the seasonality of Hard Red Winter Wheat (KW) futures?

HRW wheat futures tend to perform better in certain months, such as February, April, May, August, and September, according to historical seasonality patterns.

Conclusion

While trading HRW wheat futures offers opportunities to hedge risks, diversify your trading portfolio, and potentially make money from speculation, if you want to trade this contract successfully, you have to use the right Hard Red Winter Wheat (KW) futures strategy.

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