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Wheat Trading Strategy (Backtest And Futures Example)

Trading agricultural commodity futures contracts, such as wheat futures, offers the opportunity to diversify your portfolio into the soft commodity market. Wheat futures can also be traded for hedging purposes or just speculation. For speculators, the goal is to profit from price fluctuations. Whatever the reason for trading, to trade it successfully, you will need a wheat futures strategy.

A wheat futures strategy refers to the methodologies and techniques you can use to trade wheat futures contracts profitably. Wheat futures are tradable derivative products that represent a contract to buy or sell a specified quantity of wheat on a future date, at a pre-agreed price. The contract trades on the CME Globex platform and is deliverable on expiry. You can use a wheat futures strategy to speculate on the price of wheat, diversify your portfolio, or hedge your exposure in the wheat market.

In this post, we answer some questions about the Wheat futures strategy. We will focus on the SRW wheat futures and also make a backtest

What are Wheat futures?

Wheat futures are standardized, exchange-traded contracts in which the contract buyer agrees to accept delivery, from the seller, a specified amount of Wheat (e.g., 5000 bushels) of a particular type of wheat at a fixed price on a future delivery date. The contract is traded on the CME Group’s CME Globex. There are different types of wheat — Hard Red Winter Wheat (HRW), Hard Red Spring Wheat (HRS), and Soft Red Winter Wheat (SRW).

Here, our focus is on the Chicago SRW wheat futures (ZW). At contract expiration, the seller of the wheat futures contract delivers the specified amount and quality of SRW wheat to the buyer via the exchange. Wheat traders who don’t want to get involved in wheat delivery can close out their positions before expiry or roll them over to the next contract month.

What is a Wheat futures strategy?

An SRW wheat futures strategy refers to the methodologies and techniques you can use to trade the contract profitably. This includes technical and fundamental analyses of the SRW wheat futures market for good market timing. While technical analysis focuses on studying the chart, fundamental analysis involves studying the factors that affect wheat futures.

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

Wheat futures strategy backtest

A strategy backtest with trading rules and settings is coming shortly.

What is the seasonality of Wheat futures?

Seasonality in wheat futures refers to the tendency of wheat futures 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.

Wheat futures have been noted to perform better from July to December, as can be seen in the chart below:

Wheat futures strateg
Source: Equity Clock

What moves the Wheat market What affects the Wheat market the most?

So many factors can affect the prices of wheat futures contracts, so as a wheat trader, you need to watch out for them. They include the following:

Weather Events: Weather conditions can affect wheat production and pricing. Adverse weather conditions, such as drought or too much rain, may reduce production and increase wheat prices, while ideal weather conditions can boost yield and force prices down.

The value of the US dollar: Just like other commodities, wheat futures contracts are quoted in US dollars, so when the currency is weak, wheat prices increase, and when the currency is strong, wheat prices fall.

Important data reports: Several periodic reports significantly move wheat prices. Some of them include the following:

  • Commitment of Traders
  • Spring Wheat Crop Condition
  • Spring Wheat Crop Condition
  • the USDA Prospective Planting Report
  • the USDA Monthly Supply & Demand
  • the Weekly Export Sales

How are Wheat futures traded?

SRW wheat futures contracts are traded on several commodity exchanges around the world, especially EURONEXT and CBOT, a member of the CME Group. The CBOT exchange can be accessed from anywhere via the CME Globex electronic platform. On the Globex platform, the contract SRW wheat futures trade from Sundays to Fridays, from 7:00 pm to 7:45 am CT the next day, and Mondays to Fridays, from 8:30 am to 1:20 pm CT. On the Clearport, the contract trades from Sundays to Fridays from 5:45 pm CT with no reporting Monday to Thursday from 5:45 pm to 6:00 pm CT.

There are 15 monthly contracts for Mar, May, Jul, Sep, Dec listed annually following the termination of trading in the July contract of the current year. The contract size is 5,000 bushels of SRW wheat. Settlement is by physical delivery method, and trading terminates on the business day before the 15th day of the contract month. CME Group staff determines the daily settlements in CBOT Wheat (ZW) futures based on trading activity on CME Globex between 13:14:00 and 13:15:00 Central Time (CT), the settlement period.

How do you start trading Wheat futures?

You trade the contract through a futures broker, which would grant you access to the CME Group’s exchange where SRW wheat futures contracts are traded and also help to clear your trades. To start trading, register with a futures broker and fund your account. Registering directly with the Globex trading platform may also be possible, but you need a broker to clear your trades.

If you 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 a contract with the broker to exchange the price difference between the opening and closing of a trade. CFDs enable you to trade price fluctuations without worrying about the rigors of asset delivery in direct futures trading.

What is the Wheat trading at?

SRW wheat futures were trading at 749’2 USX (US cents) as of December 19, 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 Wheat (SRW) futures hour?

On the CME Globex platform, SRW wheat futures trade from Sundays to Fridays — from 7:00 pm to 7:45 am CT the next day, and Mondays to Fridays, from 8:30 am to 1:20 pm CT.

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

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

Where can I find trading charts?

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 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. Another option is to use the chart on Yahoo Finance.

What are the trading symbols for Wheat (SRW) futures?

The trading symbol for the SRW wheat futures contract is ZW. The product codes for the different services are as follows:

  • CME Globex: ZW
  • CME ClearPort: W
  • Clearing: W
  • TAS: ZWT

What is the specification for the Wheat (SRW) futures contract?

One contract unit of SRW wheat futures is equivalent to 5,000 bushels of SRW wheat. The price quotation is in US cents per bushel. The minimum price fluctuation of the full contract is 1/4 of one cent (0.0025) per bushel, which translates to a tick size of $12.50 per contract.

There are 15 monthly contracts for Mar, May, Jul, Sep, Dec listed annually following the termination of trading in the July contract of the current year. Settlement is by physical delivery method, and trading terminates on the business day before the 15th day of the contract month.

Why should you start trading Wheat (SRW) futures?

There are many reasons to choose to trade wheat futures contracts, and these are some of them:

  • If you are a wheat farmer, you will trade the contract to secure good prices ahead of harvest
  • If you use wheat in your production process, you will 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?

One contract unit of SRW wheat futures is equivalent to 5,000 bushels of SRW wheat. Given the current price of 749.2 US cents, as of writing, the total USD worth of one contract would be 5,000 x 749.2 US cents = 3,746,000 US cents or 37,460 USD.

What is the tick size?

The tick size of one full contract of SRW wheat futures is $12.50 per contract.

What is the minimum price fluctuation for Wheat (SRW) futures?

The minimum price fluctuation of the full contract is 1/4 of one cent (0.0025) per bushel.

Are there any ETFs?

Yes, there is one wheat futures ETF 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 Wheat (SRW) prices?

They include factors that move the demand and supply of SRW 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 Wheat (SRW) futures?

Based on the TradingView chart for the SRW wheat futures (ZW), the all-time high of this contract is 1363’4 US cents, which it reached in March 2022.

What are the biggest risks in trading Wheat (SRW) futures?

The biggest risk when trading any futures, including the SRW wheat 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. So, if you trade with a 20x leverage, a 1% adverse movement will lead to a 20% loss, and a 5% adverse movement will result in a 100% loss in your account.

What is the settlement method?

Deliverable

What is the settlement procedure?

There is a normal daily settlement where the CME Group staff determines the daily settlements in CBOT Wheat (ZW) futures based 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 SRW wheat is physically delivered by the seller under the supervision of CME.

What is the block minimum for Wheat (SRW) futures?

RTH – 200

ETH/ATH – 100

What is the difference between Wheat (SRW) futures and the CFD instrument for Wheat (SRW)?

SRW wheat futures are standardized contracts that trade on a regulated futures exchange, whereas SRW wheat CFDs, which online CFD brokers offer, 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, SRW wheat futures have expiry dates and may involve the delivery of wheat, but CFDs don’t come with those issues.

Which forex instrument is the same as Wheat (SRW) futures

SRW wheat CFD

What are some important dates for this market?

Some important dates in the SRW wheat futures market include:

  • 1877 when SRW wheat futures began trading
  • 1886 when options on SRW wheat futures started trading
  • 2022 when it reached its current all-time high of 1363’4 US cents

What is the highest Wheat (SRW) has ever been its all-time high?

Based on the TradingView chart for the SRW wheat futures, the highest price the SRW wheat futures has ever reached was 1363’4 US cents, which happened in March 2022.

What is the lowest Wheat (SRW) has ever been its all-time low?

Based on the TradingView chart for the SRW wheat futures, the lowest price the SRW wheat futures has ever reached was 133’2 US cents, which happened in June 1970.

Conclusion

While trading SRW wheat futures gives possibilities to hedge risks, diversify your trading portfolio, and perhaps earn money from speculation, if you want to trade this product effectively, you need to use a good Wheat (SRW) futures strategy.

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