Palladium Trading Strategy – Backtest, Futures And Example

Discovered in 1803 by an English chemist, William Hyde Wollaston, palladium has become a very important component of catalytic converters in automobiles. Palladium futures are the easiest and cheapest way to trade in the palladium market. But to trade successfully, you will need a palladium futures strategy.

A palladium futures strategy refers to the methodologies and techniques you can use to trade palladium futures contracts profitably and would include technical and fundamental analyses of the palladium futures market. Palladium futures are financial derivative products that represent a contract to buy or sell a specified quantity of palladium on a future date, at a pre-agreed price. The contract trades on the CME Globex platform. You can use a palladium futures strategy to speculate on the price of palladium, diversify your portfolio, or hedge inflation or your exposure to the market.

In this post, we answer some questions about the Palladium futures strategy. We also show you a backtest of such a strategy. If you are interested in accessing more trading strategies, please our landing page for different types of trading strategies.

What are Palladium futures?

Palladium is a rare and lustrous silvery-white metal that is usually found alloyed with other platinum group metals (PGMs), which include platinum, rhodium, ruthenium, iridium, and osmium, in platinum ores. It was discovered in 1803 by an English chemist, William Hyde Wollaston. Palladium is the second (after platinum) most widely used of the six elements of the platinum group metals. As with platinum, palladium’s excellent catalytic properties make it very useful in catalytic converters on automobiles.

Given the importance of palladium in the control of automobile emissions of pollutants, palladium futures have witnessed steady growth in recent times.

Palladium futures are standardized, exchange-traded contracts in which the contract seller agrees to deliver to the buyer a specified quantity of palladium (eg. 100 troy ounces) at a predetermined price on a future delivery date. The contract trades on the CME Globex platform, allowing participants to speculate on the price of palladium, diversify their portfolio, or hedge inflation or their exposure to the market.

What is a Palladium futures strategy?

A palladium futures strategy refers to the methodologies and techniques you can use to trade palladium futures contracts profitably and would include technical and fundamental analyses of the palladium futures market. It aims at achieving optimal market timing, as well as position sizing and risk management techniques.

Your palladium futures strategy must include precise entry and exit signals. It enables you to speculate on the price of palladium, diversify your portfolio, or hedge inflation or your exposure to the market.

Palladium futures strategy backtest

We like seasonal trading strategies and today we show such a strategy for the ETF that tracks palladium. The ETF has the ticker code PALL. It’s not as liquid as the futures contract, though.

Let’s look at the monthly performance:

The first column shows the month. Clearly, the months of January, February, and December are positive (three in a row). Let’s backtest we go long in December and sell on the first of March. We make the following trading rules:

• Go long at the open of December; and
• Sell at the open of March.

This makes the following equity curve:

This is not a very appealing equity curve.

That said, we are not particularly fond of commodities. they make a great diversification to stocks and bonds, but it’s very hard to find commodities trading strategies that last for a long time. Commodities are too erratic for our liking.

What is the seasonality of Palladium futures?

Seasonality in palladium futures, as in other financial markets, refers to the tendency of palladium futures prices 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, palladium futures tend to perform better during the winter months of December, January, and February than during any other period of the year. In fact, it tends to do very poorly in Spring.

What moves the Palladium — What affects the Palladium the most?

Here are some of the factors that move the palladium market:

• Demand by the automobile industry: About 75 percent of palladium demand comes from the automobile industry, where it is used in making catalytic converters. A rising automobile demand would lead to high palladium prices.
• Supply shortages: About 75 percent of the global palladium supply come from Russia and South Africa. Political events or trade policies in those countries can lead to supply disruptions and affect prices.
• Prices of substitutes: While other PGM elements, such as platinum and rhodium, can serve as substitutes for making catalytic converters, they can only be alternatives if their prices are cheaper than those of palladium.

How are Palladium futures traded?

Palladium futures contracts trade on the CME Group’s futures exchange and can be traded from any part of the world via the CME Globex electronic platform. The contract trades from Sundays to Fridays from 5:00 p.m. to 4:00 p.m. CT the next day, with a one-hour break at the end of each day.

There are monthly contracts listed for 3 consecutive months and any March, June, September, and December contracts listed for 15 months. One contract unit of palladium is equivalent to 100 troy ounces of palladium. Settlement is by physical delivery method, and trading terminates on the 3rd last business day of the contract month.

How do you start trading Palladium futures?

You need a futures broker that would grant you access to the exchanges where palladium futures contracts are traded and help clear your trades. So, the first thing to start trading palladium 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 palladium CFDs that track palladium 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. Top CFD brokers, like IG, may offer palladium futures CFD.

What is the Palladium trading at?

Palladium futures were trading at $1879.5 per troy ounce, as of November 25, 2022. See the chart here on the CME platform chart or TradingView.

Since the price changes from time to time, 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 Palladium futures hour?

Palladium futures trade on the CME Globex electronic platform from Sundays to Fridays; the trading hours begin from 5:00 p.m. to 4:00 p.m. CT the next day. There is a one-hour break before the start of the next trading day (4:00 p.m. – 5:00 p.m. CT) from Monday to Thursday for maintenance.

For CME ClearPort, the schedule is Sunday to Friday, from 5:00 p.m. – 4:00 p.m. CT with no reporting Monday – Thursday from 4:00 p.m. – 5:00 p.m. CT.

For Trading at Settlement (TAS), the schedule is Sunday – Friday 5:00 p.m. – Noon CT.

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. But if you want to connect TradingView to your broker, you must subscribe to its Pro services. You can also use the chart on the CME platform.

Also, Yahoo Finance is another place where you can find palladium futures charts. Alternatively, you can subscribe to trading charts through a third-party platform like MultiCharts.

What are the trading symbols for Palladium futures?

The trading symbol for palladium futures is PA. other product codes for the contract are as follows:

• CME ClearPort: PA
• Clearing: PA
• TAS: PAT

What is the specification for the Palladium futures contract?

One contract unit of palladium is equivalent to 100 troy ounces of palladium. The price quotation is in US dollars per troy ounce. The minimum price fluctuation is $0.50 per troy ounce, which is equivalent to $50.00 per contract.

There are monthly contracts listed for 3 consecutive months and any March, June, September, and December contracts listed for 15 months. Settlement is by physical delivery method, and trading terminates on the 3rd last business day of the contract month.

Why should you start trading Palladium futures?

These are some of the reasons to trade palladium futures contracts:

• You can use it to hedge against price changes if you are a palladium producer
• You can use it to ensure a stable supply of palladium if you use it to produce catalytic converters for automobiles
• You can use it to hedge against inflation since the commodity price rises with inflation
• As an investor, you can use it to diversify your investment portfolio
• As a trader, you can use it to speculate on palladium prices and profit from the price fluctuations

What is the contract size?

A contract unit of palladium futures is equivalent to 100 troy ounces of palladium. The total dollar worth of a contract depends on the current price of palladium. So, at the current price of palladium, $1879.5 (as it is as of writing), the USD worth of a full contract unit would be 100 x $1879.5 = $187, 950.

What is the tick size?

One contract of palladium futures has a tick size of $50.00 per tick per contract.

What is the minimum price fluctuation for Palladium futures?

The minimum price fluctuation is $0.5 per troy ounce.

Are there any ETFs?

While there are no ETFs that track palladium futures, there is an ETF that tracks palladium spot market prices — abrdn Physical Palladium Shares ETF (PALL). The fund tracks the spot price of palladium bullion by holding bars of the metal in a secure vault, so investors don’t have to look for a place to store the commodity.

PALL offers exposure to the precious metal beyond holding a futures contract on palladium as there are no pure palladium miners. By holding the physical metal, instead of futures contracts, PALL avoids roll yield issues, which are inherent in futures trading.

What factors affect Palladium prices?

These are some of the factors:

• The demand for palladium from the automobile industry
• The availability and cheapness of substitutes, such as platinum or rhodium
• Political situations in major producing nations — Russia and South Africa
• The strength of the U.S. dollar — a stronger U.S. dollar can act as an incentive for producers to increase their output, which could lead to a supply surplus, pushing palladium prices down.

What is the all-time high for Palladium futures?

According to the TradingView chart for the palladium futures (PA), the all-time high for this futures contract is $3425.00. This price was reached in March 2022.

What are the biggest risks in trading Palladium futures?

The most significant risk in trading palladium 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 20x leverage, for example, a 1% negative price movement would result in a 20% loss in your account, and a 5% negative price movement would wipe out your entire account.

Another major risk is the relatively low liquidity when compared with gold. 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 market can be cyclical due to the fact that it is tied to the automobile industry.

What is the settlement method?

Physical delivery

What is the settlement procedure?

The usual daily settlement is carried out by CME Group staff based on trading activity on CME Globex during the settlement period. The settlement period is defined as: 12:58:00 to 13:00:00 ET for the Active Month and 12:30:00 to 13:00:00 ET for calendar spreads.

On contract expiry, the final settlement is by the physical delivery of the specified quantity and quality of palladium, which is supervised by the exchange.

What is the block minimum for Palladium futures?

10 contracts

What is the difference between Palladium futures and the CFD instrument for Palladium?

Unlike palladium futures which trade on regulated futures exchanges, palladium CFDs are simply agreements between you and an online CFD broker to exchange the price difference from the time a trade is opened and the time it is closed. In other words, CFDs put you at the mercy of the CFD broker. However, CFDs make things easier, as they 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 Palladium futures

Palladium CFD

What are some important dates for this market?

Some important dates for the palladium market include:

• The late 1980s when it was discovered that palladium acted as a great material for the catalytic converter in automobiles
• May 1992 when the market made its all-time low of $77.00
• March 2022 when the market made its all-time high of $3425.00

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

According to the TradingView chart for the palladium futures (PA), the highest level palladium futures has ever reached was $3425.00. It made that all-time high in March 2022.

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

According to the TradingView chart for the palladium futures (PA), the lowest level palladium futures has ever reached was $77.00. It made that all-time low in May 1992.

Conclusion

While trading gold futures offers opportunities to hedge risks, diversify your trading portfolio, hedge inflation, and potentially make money from speculation, you need to use the right palladium futures strategy if you want to succeed in the market!

FAQ:

What is the seasonality of Palladium futures?

Palladium futures exhibit seasonality, performing better during winter months (December, January, February) and poorly in spring, as indicated by historical trends.

What moves the Palladium market the most?

Factors influencing palladium prices include demand from the automobile industry, supply shortages, prices of substitutes (platinum, rhodium), and geopolitical events in major producing nations.

What are the biggest risks in trading Palladium futures?

Major risks include adverse price movements due to leverage and relatively low liquidity, making it challenging to exit positions. Market cyclicality is tied to the automobile industry.