Strategies and Tips for Trading Copper
- For trading, copper is a very liquid commodity.
- Copper is valued in US dollars, hence the value of the dollar has an impact on its value.
- Along with a variety of other options, copper is gaining popularity as an investment option.
- Copper prices tend to fare well when emerging markets are growing, as demand comes from building and construction, as we saw in our primer on copper.
- Technical and fundamental analysis can be used in copper trading techniques.
Copper is a worldwide metal with a wide range of applications in industry and is closely linked to economic growth. Copper trading is frequently utilized by hedgers and speculators to protect themselves against future price changes or to profit from them. Copper and copper trading are accessible to both people and institutions, making this metal a popular choice within the commodities trading spectrum.
WHAT IS THE PURPOSE OF COPPER TRADING AND HOW DOES IT WORK?
Copper trading has a number of advantages, one of which is its accessibility. Copper is traded in a variety of ways, including futures, options, stocks, and CFDs. Copper ETFs (exchange-traded funds) such as CPER (United States Copper Index Fund) and JJCB can also be used to obtain exposure to the metal (iPath Series B Bloomberg Copper Subindex Total Return ETN).
Copper is a soft, pliable metal having gold and silver-like qualities. Building construction, transportation equipment, and electrical devices account for the majority of its demand. Because it is a superb conductor of electricity and heat, it has a wide range of industrial applications, which means it trades in huge volumes, which is good for traders because it means lower spreads and perhaps cleaner chart patterns.
Copper prices are heavily influenced by demand from emerging markets such as China and India. These countries demand large amounts of copper during periods of economic growth, which helps to raise the price of the metal. During economic downturns, on the other hand, demand for copper falls, and the price drops with it. When trading copper, traders should keep in mind this dynamic.
Many copper traders base their trading strategy on technical and/or fundamental analysis, which aids in predicting whether the price of copper will rise or fall. Once a trader is confident in their prediction, he or she can buy or sell copper to profit from price fluctuations. A trading strategy can also assist a trader in risk management, identifying buy and sell signals in the market, and establishing reasonable take-profit and stop-loss levels in order to achieve positive risk-to-reward ratios.
TRADING HOURS FOR COPPER
On the CME Globex and CME ClearPort, copper is traded:
Sunday – Friday 6:00 p.m. – 5:00 p.m. (5:00 p.m. – 4:00 p.m. Chicago Time/CT), with a 60-minute break at 5:00 p.m. (4:00 p.m. CT)
WHAT ARE THE FACTORS THAT AFFECT THE COPPER PRICE?
The US dollar is the currency of the United States.
Copper, like many other metals, has an inverse relationship with the US Dollar (see chart below), which means that when the US Dollar depreciates, copper prices generally rise, and vice versa. It’s important to note that this isn’t a one-to-one relationship (delta 1), but it does have a high degree of correlation.
Because copper is priced in US dollars, the US Dollar has an impact on the price of copper. When the value of the dollar falls, for example, a buyer will have to pay less of his or her home currency to buy a certain amount of copper. As a result, the commodity (copper) becomes less expensive to purchase. This usually leads to an increase in demand and, as a result, a rise in copper prices.
Representation of the inverse correlation between copper and the US dollar on a chart:
Copper is refined by melting down the metal to remove impurities. This process consumes a lot of energy and accounts for a significant portion of the overall cost. Oil prices tend to follow the same pattern as copper prices (see chart below). However, many of the same factors that affect copper prices also affect oil prices, which could support the traditional positive relationship. Regardless of the specifics, it is clear that copper and oil have a relationship, which could provide valuable insight into the copper market. The popularity of renewable energy sources is growing, which could disrupt the historical price dynamics between copper and oil.
Copper as a Global Growth Barometer
Copper is frequently linked to industrial development and, as a result, to overall economic development. Infrastructure, manufacturing, and construction now play a significant role in the economy, which is heavily reliant on copper. Copper consumption (demand) tends to reflect in price, with an increase in demand generally followed by an increase in price, and vice versa. Copper is widely regarded as the king of base metals because it is the most widely used metal in both developing and developed economies.
The general economics of supply and demand are observed which can be used as a rule of thumb when trading copper:
- Increase in supply ↔ Lesser demand
- Decrease in supply ↔ Higher demand
China has a significant impact on copper demand and supply. China is the world’s single largest copper buyer. Despite the fact that China has its own mines, the country’s demand necessitates additional supply from other major copper producers. This is why, when trading copper, the Chinese economy is so important to consider. Copper demand is expected to remain stable if China’s growth trajectory continues (see chart below). It’s important to remember that China is committed to long-term self-sufficiency, which could disrupt future supply/demand dynamics.
Positive correlation between copper and the FTSE China A50 chart:
Costs of copper production and supply.
Copper mining is primarily concentrated in South America, which has a significant impact on copper prices. Price fluctuations can be caused by a lack of supply, poor copper quality, or variations in production costs. This leads to country-specific risk, which can affect supply as a result of political unrest or labor issues.
Copper workers in Chile (the world’s largest copper producer) declared a strike in mid-2018 unless their increased wage demands were met. As a result of the threat of a supply shortage, copper prices were significantly manipulated, causing a surge to multi-year highs at the time (see chart below).
The reaction of copper prices to the Chilean copper strike is as follows:
COPPER AS A PROFITABLE INVESTMENT.
Copper has long been thought of as a commodity with few investment opportunities. The majority of copper trading was done to lock in a specific price and protect against future price fluctuations. This has changed in recent decades as speculative traders’ influence on copper prices has grown. Copper is an investment that is highly correlated to economic growth, and large institutions and hedge funds have increased their stake in it. A fund manager who is bullish on economic growth, for example, may also be bullish on copper. There may be some cyclicality here, and it could be a good way to diversify away from traditional options.
COPPER MARKETING STRATEGIES.
Copper’s versatility and reliance on a variety of fundamental factors allow for a wide range of trading strategies. Technical, fundamental, or a combination of both trading strategies are available. Understanding how the technical and fundamental components interact, both separately and in concert, can help you develop a comprehensive copper trading strategy.
Example of a Technical Strategy:
To arrive at a trading decision, the example below uses a combination of technical analysis techniques. It’s important to remember that this is just one of many different approaches that can be used in a technical strategy.
Price action, support and resistance, and a technical indicator are used in the weekly copper chart above to determine a possible setup in copper. The Fibonacci retracement is drawn from the low in January 2016 to the high in June 2018. Several support and resistance zones have resulted from this drawing. Several of these zones are clearly confluence zones, which price adheres to/respects.
As the price approached March 2020, the $1.93 per pound low (black) provided significant support. From a technical standpoint, if price did not break through the $1.93 support zone as it approached the 2016 low, the inclination would be to buy.
With an oversold signal below the 30 level, the Relative Strength Index (RSI) backed up this theory (blue). When these two simple techniques were combined, it resulted in increased motivation for a long position. A long trade would have been profitable in this case, as price reversed into the current medium-term upward trend.
Example of a Fundamental Strategy:
Understanding the fundamental levers involved in copper trading will allow for the development of appropriate trading strategies. The impact of the global COVID-19 pandemic on copper is depicted in the daily chart above.
Returning to the factors that affect copper, it is common knowledge that copper is highly correlated (positive) with economic growth. As a result, if economic growth is disrupted, supply and demand subtleties should be disrupted as well. With the global pandemic expected to begin in early 2020, it’s reasonable to expect a slowdown in economic growth as the virus spreads around the world.
Economic growth has slowed, as expected, and copper has followed suit. Copper prices fell by roughly 30% from January to mid-March 2020 as a result of the COVID-19 pandemic. Understanding the dynamics of fundamentals in copper trading can lead to prudent decision-making in this situation.
Example of a Fundamental and Technical Strategy:
Using both fundamental and technical analysis in a trading strategy takes more time, but it may result in a better model because it includes more data. Due to trade tensions between the US and China, as well as a reduction in Chinese import volume, copper prices were trading at a one-and-a-half year low at the start of 2019. However, as trade tensions dissipated, copper prices rose over the next few months, aided by a weaker US dollar.
From a trading standpoint, managing these complexities can begin with a simple technical setup, such as a Fibonacci retracement. As in the previous technical example, the Fibonacci drawing above was drawn from the January 2016 low to the June 2018 high. The 50 % $2.62 per pound zone is a key area of support at the start of January, according to the Fibonacci. As the price fluctuates around this support zone, there is no directional bias at this time.
Fundamental factors play an important role in the trading of copper. Market participants who follow macroeconomic events such as the US-China trade talks will notice a reduction in volatility and intensity as the topic fades away. With this information and a weakening dollar, the chances of copper prices rising in the near future become more likely. With prices near the 50% Fibonacci level of $2.62 per pound and a bullish macroeconomic environment, a copper trader might consider taking a long position from this support zone in anticipation of a price move higher.
For more risk-taking traders, stop losses could have been placed at the recent swing low around the $2.54 – $2.56 support zone (black), or at the 50% $2.62 level for more risk-averse traders. Risk management is an important part of any strategy, and it should be done consistently and appropriately to ensure safe trading.
The 38.2 % $2.79 per pound Fibonacci level would have been the next level of resistance, where traders may look to exit long positions and look for possible reversals or an extension of the already strong bullish move. The Moving Average (MA) indicator was useful in this case because the 50-day MA (red) crossed above the 100-day MA (black), indicating a bullish price movement. Copper prices extended further after this crossover appeared in mid-January 2019, thanks to continued supportive macroeconomic conditions. Additional data inputs, such as the bullish MA crossover, can provide traders with the necessary information to choose a focused trade.
SUMMARY OF COPPER MARKETING.
Copper has evolved into a well-diversified metal that can now be considered an investment option. Copper technicals and fundamentals can be interpreted in a way that puts market participants in a good position to profit from price movement. These diverse influences on copper can be difficult to navigate, but with more exposure and awareness, more clarity should emerge.
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