Lumber Trading Trading Strategy (Example, Rules, Settings, Backtest, Performance)

Last Updated on July 3, 2023

Lumber is a key material for house construction, and lumber futures is the main method of trading this commodity. Used by builders, furniture makers, kitchen cabinet makers, and so on, lumber currently contributes more than $600 billion to the global economy, accounting for approximately 1% of the global GDP. With a huge chunk of this trading as lumber futures, what is your lumber futures trading strategy?

A lumber trading strategy is a method or technique that can be used to profitably trade the lumber futures market. Lumber futures are a financial derivative contract to deliver or receive a specified quantity of lumber on a future date and at a pre-agreed price. The contract currently trades on the CME Globex platform, and it enables traders to gain leveraged exposure to the softwood market. Hedgers and speculators trade lumber futures for risk management and financial gain through price speculation.

In addition to a backtest, we also answer some questions about the Lumber futures trading strategy.

Related reading: Free commodity trading strategies and systems

Table of contents:

What are Lumber futures?

Lumber futures are a financial derivative contract to deliver or receive a specified quantity of lumber on a future date and at a pre-agreed price. The contract currently trades on the CME Globex platform, and it enables traders to gain leveraged exposure to the softwood market. On contract expiry, trades are settled through the actual delivery of lumber to the buyer.

The contract is mostly traded by industry stakeholders, such as lumber producers and suppliers, builders, and furniture makers, who trade it for hedging purposes. However, some investors and traders also trade it to diversify their portfolios or speculate on lumber prices.

What is a Lumber futures strategy?

A lumber futures strategy is a set of methodologies and techniques for trading lumber futures profitably. It includes fundamental and technical analysis strategies. With the fundamental analysis, you can identify the factors dominating the market, while technical analysis can help you with market timing, position sizing, and risk management.

You must have a reliable trading strategy to increase your chances of making money with futures trading. Your strategy for the lumber futures market should include clear entry and exit signals and risk management techniques.

Lumber futures strategy backtest – trading rules and setup

Lumber and commodities are very hard to trade, and strategies tend to “break down” much faster than in stocks, for example (which is our favorite trading vehicle).

Let’s show you an example of a trading strategy in the trading platform called TradingView:

Can we find profitable Commodity Investing Strategies using TradingView and Pine Script?

Yes, in this section we show you how we use TradingView to make a profitable trading strategy for Lumber by using the Parabolic SAR indicator. The strategy made 1 447% in two years.

Before you jump to buy lumber, please be advised that this strategy is only discussed for informational purposes (and nothing else).

Does the strategy have a real trading edge, or is it just randomness? Let’s find out.

Parabolic SAR Strategy Overview

The lumber trading strategy in this article uses the indicator from our Parabolic SAR Trading Strategy. We recommend you read that article for further details on the indicator itself.

The Parabolic SAR (PSAR) is a trend following indicator, and we would expect it to be useful for any asset that exhibits long term trends, whether bullish or bearish. Most commodities are known for having long (but erratic) trends.

The price of lumber has been trending strongly in both directions since 2021, and this is probably one of the main reasons this strategy has been performing well in this recent time period.

Lumber PSAR Strategy Trading Rules in TradingView

The Pine Script Parabolic SAR Strategy we have used can be found in TradingView’s list:

Lumber PSAR Strategy Trading Rules

We used the following variables and settings in our backtesting:

  • Parabolic SAR Strategy
  • No changes to Parabolic SAR inputs.
  • LUMBER CFD symbol (by Pepperstone)
  • 2-hour timeframe

We’ll call this combination of variables the “Lumber PSAR Strategy”.

No changes have been made to the inputs of the Parabolic SAR Strategy itself on TradingView, but you should set the order size to 100% of equity if you wish to see the fully compounded end result.

The 2-hour timeframe was chosen due to the strategy’s good performance on this timeframe. The strategy performed decently down to the 15-minute timeframe. Finding trading opportunities for commodities on such low timeframes is a rarity.

The trade logic for the Parabolic SAR Strategy on TradingView is as follows:

  • When the close crosses above the Parabolic SAR, we place a short (sell) stop order at the next bar’s Parabolic SAR level.
  • When the Parabolic SAR crosses above the close, we place a long (buy) stop order at the next bar’s Parabolic SAR level.

The Parabolic SAR indicator itself is clearly visible in the price chart, along with entries and exits based on the trade logic above: 

Lumber trading strategy Parabolic SAR

As always, make sure you understand what is going on by comparing the written logic with what you see in the price chart, before applying any strategy in live trading.

Lumber PSAR Strategy Backtest Equity Curve

We are now ready to see the equity curve for the Lumber PSAR Strategy. We have backtested this on a Lumber CFD by Pepperstone, on a 2-hour timeframe, from June 2021 (the furthest back this CFD goes) until today.

This strategy exhibits many of the traits we value as traders: 

  • A good Win Ratio (Percent Profitable). Should preferably be close to 50%, which it is.
  • A good Profit Factor. Should preferably be above 1.75, which it is.
  • Low Drawdown. Should preferably be below 25%, which it is.
  • The average gain per trade is good, and there is little chance of transaction costs eating up our profits.

Additionally, it has a pretty decent Sharpe Ratio at 0.75. In order to see the Sharpe Ratio and other advanced backtesting results, you can access TradingView’s Performance Summary:

Lumber strategy backtest performance and statistics

Overall, the Lumber PSAR Strategy seems to perform well, and is worth analyzing further.

Evaluating the Lumber PSAR Strategy

Does the Lumber PSAR Strategy represent a real trading edge, or is it just randomness? This is a crucial question we need to answer.

Let’s zoom out and look at the broader picture. Comparing the price development of our Lumber CFD to the S&P 500 from 2021 until today, we can see some clear differences in the price performance:

Evaluating the Lumber PSAR Strategy

While both charts have trending periods, the S&P 500 is more choppy, while lumber exhibits stronger and smoother trends.

Backtesting the same strategy on the S&P 500 from 2021 until now, gives us the following equity curve:

The strategy’s performance has clearly decreased in the S&P 500’s less trending market conditions.

Comparing the strategy’s performance on these two charts for the same time period shows how long-term trends remain crucial when trading on shorter timeframes.

When using a Trend Following Strategy such as the Parabolic SAR on a shorter timeframe, we are heavily influenced by the long-term trend in the asset we are trading. The strategy merely makes use of these long-term trends more efficiently than a Buy and Hold Strategy.

Stronger and smoother long-term trends lead to better outcomes with short-term trend following strategies. With the trends we have seen in lumber prices since 2021, it is no surprise that the Lumber PSAR Strategy has performed well during this period.

Lumber trading strategy – conclusion

Traders need to be aware of how short-term strategies can seem statistically significant, while in reality being dependent on long-term trends that are random in nature.

The Lumber PSAR Strategy is likely a result of randomness, and would not have performed well in a range-bound market. Long-term price trends matter for short-term strategies.

More precisely, what we are seeing is not what we usually think of as ‘randomness’, but the results of the price of lumber being heavily influenced by geopolitical events since 2021. This is still randomness in the statistical sense, as such events and their consequences are difficult if not impossible to predict.

The Future of the Lumber PSAR Strategy

Does this mean that the Lumber PSAR Strategy should be discarded? Probably yes, but here is one alternative view:

The wide swings in lumber prices since 2021 occurred in the context of geopolitical instability and generally bearish market conditions. Under these difficult conditions, the Lumber PSAR Strategy has performed remarkably well.

Most strategies underperform in times of economic turmoil, while this one stands a good chance of thriving under such conditions. A trader might for this reason consider allocating some capital to the Lumber PSAR Strategy. 

The role of the Lumber PSAR Strategy in a wider Portfolio of Strategies could then be to hedge against geopolitical risk, knowing that it will drain some capital if the lumber price goes sideways, but could generate profits or at least offset losses in times of market volatility. You never know when a lumber trend sets in, and if it does, our Lumber Parabolic SAR strategy will profit handsomely.

Consider this as food for thought, not encouragement to start trading lumber using this strategy. This is for informational purposes only, to exhibit ideas you can use in developing your own trading strategies.

How is Lumber traded?

If we wanted to trade lumber in some fashion, how could we go about doing so?

We’ll wrap up this section by discussing two of the most common ways to trade lumber.

Lumber Futures Trading

Lumber futures are traded on the Chicago Mercantile Exchange (CME). A standard lumber futures contract on the CME represents 27,500 board feet of random length 2x4s (a typical size for construction lumber), which is roughly the amount which can be loaded onto a single transport truck. The pricing unit is in USD per 1,000 board feet.

Each lumber futures contract consists of an amount of lumber equivalent to x27.5 the pricing unit (27,500 board feet / 1,000 board feet). This means that a lumber futures contract is worth ≈$12,513 (110 x $455) at the time of writing. Using margin to trade is possible, but this means that you’re essentially using borrowed money to control a larger position. This amplifies the potential for profits if the market moves in your favor, but it also magnifies losses if the market moves against you.

These contracts are settled physically, meaning that upon contract expiration, the buyer is obliged to accept delivery of the lumber, and the seller is obliged to provide it. However, most traders opt to roll over their contracts to the next month or close their positions before the delivery period to avoid physical settlement. Make sure to roll over contracts before expiry, unless you’re prepared to cover transport and storage costs, or you’re planning to build a house.

Lumber CFD trading

Due to the high price tag of trading Lumber Futures, you might consider trading Lumber CFDs (Contracts For Difference). These allow you to trade much smaller quantities, and remove the ‘risk’ of physical settlement. 

CFDs are not available in all jurisdictions. This is the case in the United States, where the law requires you to have a personal net worth above $5 million USD to trade CFDs. In most European countries, CFDs are easily available to retail traders. 

Be aware that CFDs come with their own risks which traders need to understand before trading them. Most CFD traders end up losing money. For example, at IG about 80% of the CFD traders lose money.

The price of a CFD follows the futures price, but often involves much smaller quantities. For example, CFDs are available that represent the base pricing unit of 1,000 board feet per contract (≈$455 per contract, at the time of writing). In this article, the CFD we backtested does exactly this.

What is the seasonality of Lumber 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 be months or seasons like winter and summer.

From the chart below, lumber futures tend to perform better during the months of November, December, January, and March than other months of the year.

Lumber futures trading strategy
Source: Equity Clock

What moves the Lumber What affects the lumber the most?

The prices of lumber futures are influenced by a wide range of other factors, some of which are listed below:

  • Reports from the housing and construction industries: Lumber is a critical component of the housing and construction industries; as a result, lumber prices are typically sensitive to reports on the housing and construction industries because these reports provide indicators of the commodity’s level of demand.
  • Lumber supply: Anything that affects the production and supply of lumber, such as changes in forest cover or deforestation, can affect lumber prices.
  • Price of substitutes: Other building materials, such as metals and plastics, may be used in place of wood in some cases. This is because these alternatives are less expensive. As a result, the prices of these alternatives may have an impact on lumber prices.
  • Trade policy: Trade policies (tariffs, quotas, and subsidies) in large countries that produce and consume lumber can significantly impact lumber prices.

How are Lumber futures traded?

Lumber futures are traded on the Chicago Mercantile Exchange (CME) through its Globex electronic trading platform. There are two types of contracts: the regular lumber futures with a contract unit of 27,500 board feet and the random length lumber futures with a contract unit of 110,000 board feet. The price quotation is in US dollars and cents per 1000 board feet (MBF).

The contract trades from Monday to Friday, from 9:00 a.m. – 3:05 p.m. CT on the Globex. For the CME ClearPort, the trading schedule is Sunday 5:00 p.m. – Friday 5:45 p.m. CT, but there is no reporting Monday – Thursday from 5:45 p.m. – 6:00 p.m. CT.

There are monthly contracts of January, March, May, July, September, and November cycles listed for 7 months. The contract expires on the 16th day of the contract month, and on expiry, the contract is settled by physical delivery of the specified quantity and grade of lumber. Trading terminates at 12:05 p.m. CT on the business day prior to the day of contract expiry — the 16th day of the contract month.

How do you start trading Lumber futures?

You’ll need the help of a futures broker to help you clear your trades and gain access to the exchanges where lumber futures contracts are traded. To begin trading lumber futures, you must first open an account with a futures broker and deposit funds into that account. Because futures contracts are leveraged instruments, you do not need to have the full dollar value of the contract to trade it. Instead, you only need to deposit the initial margin or slightly more.

If all you want to do is speculate on the direction of prices, trading lumber CFDs that track lumber futures is a good option for you. When you use a contract for difference, you are in an agreement with the broker to exchange the price difference between the opening and closing of a trade. Lumber futures CFD are available from CFD brokers, such as IG.

What is the Lumber trading at?

Lumber futures were trading at $410.0 per board feet as of December 9th, 2022. See the chart here on the CME platform chart. The chart (LBS) was captured from TradingView.

Note that the price changes continuously, so the quoted price 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 Lumber futures hour?

On the CME Globex electronic platform, lumber futures (LBS) trades from Monday to Friday, from 9:00 a.m. – 3:05 p.m. CT on the Globex. For the CME ClearPort, the trading schedule is: Sunday 5:00 p.m. – Friday 5:45 p.m. CT, but there is no reporting Monday – Thursday from 5:45 p.m. – 6:00 p.m. CT.

The last trading day is the business day before the 16th calendar day of the contract month at 12:05 pm.

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 chart, you can also access the TradingView chart.

You can also subscribe to trading charts through a third-party platform like MultiCharts.

What are the trading symbols for Lumber futures?

The trading symbol is LBS. Here are the codes for the various sections:

  • CME Globex: LBS
  • CME ClearPort: LB
  • Clearing: LB

What is the specification for the Lumber futures contract?

Lumber futures contracts on the CME are priced in US dollars and cents. A random length lumber futures contract is equivalent to 110,000 board feet of lumber, and the pricing unit is dollars per 1,000 board feet (MBF). Individual pieces of lumber range in size from 2 inches by 4 inches to 8 to 20 feet in length.

There are monthly contracts of January, March, May, July, September, and November cycles listed for 7 months. The contract expires on the 16th day of the contract month, and on expiry, the contract is settled by physical delivery of the specified quantity and grade of lumber. Trading terminates at 12:05 p.m. CT on the business day prior to the day of contract expiry — the 16th day of the contract month.

Why should you start trading Lumber futures?

There are so many reasons to trade lumber futures. They include the following:

  • Hedging your exposure in the market if you are a producer or make use of lumber (a furniture maker)
  • For speculative reasons, to profit from daily changes in lumber commodity prices
  • Portfolio diversification across a variety of asset classes to lower the system’s overall risk

What is the contract size?

The CME Globex platform’s lumber futures contract equals 110,000 board feet (approximately 260 cubic meters). Given the current price of lumber at $410.0 per 1,000 board feet, the USD worth of a full contract unit would be 110,000 x $410.00/1,000 = $45,000.

What is the tick size?

One contract of lumber futures has a tick size of $11.00 per tick per contract.

What is the minimum price fluctuation for Lumber futures?

The minimum price fluctuation for lumber futures is $0.10 per MBF.

Are there any ETFs?

The two most common ETFs that track lumber futures include:

  • iShares Global Timber & Forestry ETF (WOOD)
  • Invesco MSCI Global Timber ETF (CUT)

What factors affect Lumber prices?

Many factors can affect the prices of lumber futures, and these are some of them:

  • Information from the housing and construction industries: Lumber is a critical component of the housing and construction industries; as a result, lumber prices are typically sensitive to reports on the housing and construction industries because these reports provide indicators of the commodity’s level of demand.
  • Lumber supply: Anything that affects the production and supply of lumber, such as changes in forest cover or deforestation, can affect lumber prices.
  • Cost of substitutes: Other building materials, such as metals and plastics, may be used in place of wood in some cases. This is because these alternatives are less expensive. As a result, the prices of these alternatives may have an impact on lumber prices.
  • Economic policy: Tariffs, quotas, and subsidies in large countries that are both producers and consumers of lumber can significantly impact lumber prices.

What is the all-time high for Lumber futures?

According to the TradingView chart for the CME lumber futures (LBS), the all-time high for lumber futures is $1,733.50 per MBF. This price was reached in May 2021.

What are the biggest risks in trading Lumber futures?

When trading lumber futures, the most significant risk is adverse price movement. Because it is a leveraged contract, losses are calculated based on the total worth of the contract rather than the initial margin deposit. For example, if you trade with a leverage of 10:1, a 1% negative move in price results in a 10% loss in your account, and a 10% adverse move in price would result in a complete loss of your account.

Another significant risk is a lack of liquid assets. Because fewer retail traders participate in the lumber futures market, it is not as liquid as gold or crude oil markets. As a result, it may not be easy to get out of your trade quickly and the spreads can be high.

What is the settlement method?

At expiration, the contract is settled by physical delivery.

What is the settlement procedure?

Lumber futures (LBS) are settled on the CME platform by physical delivery. CME Group staff determines the settlement of the expiring lumber contract by following the regular daily settlement procedure.

What is the block minimum for Lumber futures?

20 contracts.

What is the difference between Lumber futures and the CFD instrument for lumber?

Unlike lumber futures which trade on regulated futures exchanges, lumber 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 asset delivery, which happens with futures contracts.

Which forex pair is the same as Lumber futures

Lumber CFD

What are some important dates for this market?

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

  • 1969 when lumber futures first traded on the Chicago Mercantile Exchange (CME)
  • 2008 when electronic Random Length Lumber futures and options were launched on CME Globex

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

From TradingView’s chart for the CME lumber futures (LBS), the highest price lumber has ever reached was $1,733.50, which happened in May 2021.

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

From TradingView’s chart for the CME lumber futures, the lowest price lumber has ever reached was $94.6, which happened in October 1974.

Conclusion

Trading lumber futures allow you to diversify your trading portfolio, protect yourself from inflation, and potentially profit from speculation. However, if you want to succeed in trading lumber futures, you must use the appropriate lumber futures strategy.

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