Home Historical Backtest - Quantify Lean Hog Trading Strategy (Backtest, Setup And Futures Example)

Lean Hog Trading Strategy (Backtest, Setup And Futures Example)

Pork is the most widely consumed animal protein in the world, with more than 100 million hogs slaughtered every year. A major component of the multi-trillion-dollar livestock market, the global pork industry is very huge, and most of it is traded via lean hog futures. What is a lean hog futures strategy?

Lean hog futures are financial derivative products that represent a contract to buy or sell a specified quantity of lean hogs on a future date, at a pre-agreed price. The contract trades on CME and is financially settled. A lean hog futures strategy is the methodology or technique you can use to profitably trade the lean hog futures market. It can be used to speculate or hedge the price of pork.

In this post, we answer some questions about the lean hog futures strategy. We also backtest a strategy for profitability.

What are Lean Hog futures?

Lean hog futures are financial derivative products that represent a contract to buy or sell a specified quantity of lean hogs on a future date, at a pre-agreed price. Lean hogs refer to pigs that have reached 250 pounds, which is the minimum weight for slaughtering them.

The contract trades on CME and is financially settled. It enables industry stakeholders to hedge their risk exposure in the market while providing retail traders with an opportunity to speculate on the price of pork.

What is a Lean Hog futures strategy?

A lean hog futures strategy is the methodology or technique you can use to profitably trade the lean hog futures market. This includes fundamental and technical analyses for market timing, leverage and position sizing, and risk management.

If you want to trade lean hog futures with any success, you must have a robust trading strategy with precise entry and exit signals, plus risk management methods

Lean Hog futures strategy backtest

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

What is the seasonality of Lean Hog futures?

Historically, lean hog futures prices tend to rise during the months of March, April, and September. The market performs poorly during the winter months of December, January, and February, as you can see in the chart below:

Lean Hog futures seasonal strategy
Source: Equity Clock

What moves the Lean Hog market What affects the Lean Hog market the most?

One of the main factors that move the lean hog market is the report from the United States Department of Agriculture (USDA). There are many reports, but the key ones are the Hogs and Pigs Report, which shows the inventory and breeding information for each of the 16 largest hog-producing states, and the Monthly Slaughter Report.

How are Lean Hog futures traded?

Lean hog futures are traded on the CME futures exchange, and they can be traded from any part of the world through CME’s Globex electronic platform. The contract trades from Monday to Friday: 8:30 a.m. – 1:05 p.m. CT (9:30 a.m. – 2:05 p.m. ET).

One contract unit is equivalent to 40,000 pounds of lean hogs. The contract is financially settled, and trading terminates on the 10th business day of the contract month. The lean hog price is calculated with the CME Cash Hog Price Index, which is a two-day weighted average of cash markets.

How do you start trading Lean Hog futures?

To start trading lean hog futures, you have to register with a futures broker, such as Charles Schwab, which can offer you access to the exchange’s platform and clearinghouse, and then fund your account.

Alternatively, you may trade the lean hogs CFD via an online CFD broker, such as IG. CFDs enable you to trade price fluctuations of the futures contract without having to worry about contract expiration or asset delivery.

What is Lean Hog trading at?

Lean hog futures were trading at 83.750 US cents per pound, as of November 25, 2022.

The price changes all the time. If you want to get the real-time price on the CME platform or directly from TradingView, click on any of the links.

What’s Lean Hog futures hour?

The trading hours for lean hog futures on the CME Globex electronic platform are from Monday to Friday: 8:30 AM. – 1:05 PM CT (9:30 AM – 2:05 PM ET).

The time schedule for Trading at Settlement (TAS) is slightly different: Monday – Friday 8:30 AM – 1:00 PM CT (9:30 AM – 2:00 PM ET).

Where can I find trading charts?

You can find trading charts of lean hog futures on any trading platform that offers chart services. If your platform does offer charts, you can use TradingView, which offers free access to charts of different instruments. If you want to connect your broker to TradingView, you have to subscribe to the Pro services. You can also access the TradingView chart via the CME platform.

Another option is to subscribe to a third-party charting platform, such as MultiCharts.

What are the trading symbols for Lean Hog futures?

The trading symbol for the lean hog futures contract on CME Globex is HE. The product codes for the different services are as follows:

  • CME Globex: HE
  • CME ClearPort: LN
  • Clearing: LN
  • TAS: HET

What is the specification for the Lean Hog futures contract?

One contract of lean hog futures is equivalent to 40,000 pounds of lean hogs, and the contract is financially settled. The price quotation is in U.S. cents per pound, and the minimum price fluctuation is 0.00025 per pound, which is equivalent to $10.00 per contract.

There are 2 monthly contracts as follows:

  • February contract listed after Aug expiration
  • April listed after Oct expiration
  • May listed after Dec expiration
  • June listed after Dec expiration
  • July listed after Feb expiration
  • August listed after Apr expiration
  • October listed after May expiration
  • December listed after Jun expiration

For each contract, the last day of trading is on the 10th business day of the contract month.

Why should you start trading Lean Hog futures?

If you are a pig farmer or you have a pork-processing business, you would trade lean log futures to hedge business risk exposures. But if you are a retail trader, the main reason to trade this is to profit from price fluctuations.

What is the contract size?

A unit of the lean hog futures contract is equivalent to 40,000 pounds. Given that the price of the contract, as of writing, is 83.75 US cents or $0.8375 per pound, the USD worth of one contract of lean hog futures is 40,000 x $0.8375 = $33,500.

What is the tick size?

The tick size of a full contract unit of lean hog futures is $10.00 per contract.

What is the minimum price fluctuation for Lean Hog futures?

The minimum price fluctuation is 0.00025 per pound.

Are there any ETFs?

No, there are no ETFs that specifically track the lean hog futures market alone. However, there are a few that track the entire livestock or agricultural commodity market. The most targeted one for the lean hog market is the iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW), which tracks the cattle and lean hog markets.

What factors affect Lean Hog prices?

The main factors that affect lean hog prices include the price of pig feeds and weather conditions. Corn is a very important part of pig feeds, so the prices of corn can affect lean hog prices. Harsh weather conditions may reduce the production of pigs and cause scarcity. All these are reported in the periodic reports from the United States Department of Agriculture (USDA).

What is the all-time high for Lean Hog futures?

TradingView’s chart for lean hog futures (HE) shows that the all-time high for lean hog futures is 133.600 US cents. This price was reached in June 2014.

What are the biggest risks in trading Lean Hog futures?

When trading any futures contract, the biggest risks come from adverse price movement if you trade with huge leverage. Losses can be huge with leverage because they are calculated based on the total worth of the contract, and not the margin deposited with the broker. For example, with a 20x leverage, a 5% negative movement would wipe out your account.

Another big risk is liquidity. The lean hog market is not very liquid, as there are not many retail traders in the market. As a result, you may not easily find someone to take the other side of your trade when you want to exit your position.

What is the settlement method?

The contract is cash settled.

What is the settlement procedure?

Lean hog futures are cash settled based upon the CME Pork Cutout Index price for the five–day period ending on the day on which trading terminates. The relevant index price is on the business day after the termination of trading in the expiring contract month.

What is the block minimum for Lean Hog futures?

50 contracts

What is the difference between Lean Hog futures and the CFD instrument for Lean Hog?

Lean hog futures contracts trade on a regulated futures exchange, unlike the CFDs offered by online CFD brokers, which represent simply an agreement with the broker to exchange price difference. However, while futures have expiry dates and may involve the delivery of the asset, CFDs can be traded without such worries.

Which forex instrument is the same as Lean Hog futures

Some Forex and CFD brokers offer commodity CFDs. Those are contracts between the trader and the broker to exchange the difference in the price of the commodity between the time a trade is opened and the time it is closed.

However, only a few Forex brokers, such as IG offer CFDs on lean hog futures. It is not common to find a broker that offers trading in lean hog CFDs.

What are some important dates for this market?

Some of the important dates for the lean hog futures market include:

  • 1966 when lean hog futures contracts were introduced as live hog futures
  • 1997 when the name was changed to lean hog futures
  • January 1971 when the market made its all-time low of 15.80 US cents
  • June 2014 when the market reached its all-time high of 133.60 US cents

What is the highest Lean Hog has ever been at its all-time high?

According to TradingView’s chart for lean hog futures (HE), the highest price lean hog futures has ever traded was 133.600 US cents, which happened in June 2014.

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

According to TradingView’s chart for lean hog futures (HE), the lowest price lean hog futures has ever traded was 15.800 US cents, which happened in January 1971.

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