How to trade copper

Copper trading basics

Copper is a red-coloured base metal, which is thought to be the first metal to be used by humans. Today it has a wide range of applications in industrial manufacturing and everyday items, including microwaves and heating systems.

Copper, like silver and gold, is very ductile and conducts electricity, which makes it extremely useful. But unlike precious metals, copper is available in greater quantities, is cheaper and is not considered valuable enough to be used for currencies.

What moves the price of copper?

It is important to understand what can influence copper prices to help you predict the possible market movements and best prepare your trades. The price of copper can be impacted by a range of factors, but the some of the largest drivers of copper prices are:

Global economic growth

The price of copper is often used as a benchmark for ascertaining the health of the global economy – it has even been nicknamed ‘Dr Copper’ because it is jokingly thought of as the only metal with a PhD in economics.

If the global economy is in a period of sustained growth, then the price of copper is usually high due to the increased industrial demand for the metal. While in periods of economic downturn, the price of copper is low as there is less money being spent on infrastructure growth.

This is why speculating on the price of copper is a popular way of expressing a bullish or bearish view on world growth and gross domestic product (GDP).

Emerging markets

Countries that are rapidly developing are some of the largest players in the copper market, driven by their need for new housing and transport infrastructure as their economies grow. As a result, emerging markets such as China, India and Brazil have an increasing share of global copper demand. A slowdown in the growth of emerging markets can take its toll on the price of copper, while a boom will significantly increase the market price.

Supply disruptions

The instability caused by political and environmental issues in copper-producing regions can impact market price as supply chains are broken.

For example, as a large producing nation, Bolivia had significant sway over copper prices. This was evident in 2007, when the mining industry was nationalised and the supply chain was disrupted. The price of copper increased in response, as supply could no longer keep up with demand.

Environmental crises, such as earthquakes and landslides, can also slow down mining. For example, copper prices spiked to $2.45 per pound ($5405.00 per tonne) in 2015 when an earthquake struck Chile, the world’s top supplier of copper.

US housing market

Copper is widely used in the constructions of homes – mainly for electrical wiring and plumbing. This means that the sheer magnitude of the US housing market has a significant impact on the demand for copper. The US housing market can be monitored using factors that influence the need for housing or the price of housing, including non-farm payrolls and US GDP data releases.

Find out when the next releases are in our economic calendar.

Metal substitution

Substitution occurs across most commodity markets – it is the practice of seeking cheaper alternatives when the price of the asset rises. This could put downward pressure on copper prices, or at least prevent the market from rising.

As copper becomes more expensive, cheaper metals, such as aluminium, are being used instead of copper in power cables and electrical equipment. Other base metals, including nickel, lead and iron, are also used as substitutes for copper in some industries.

Four steps to trading copper

Choose which copper asset to trade

There are a number of ways that traders and investors can gain exposure to the price of copper – for example, you might choose to invest in copper bullion bars and coins from metal exchanges, trade copper futures contracts, or even invest in shares or ETFs.

When you trade copper, in all likelihood you will actually be trading copper futures contracts. These are contracts that take their price from the underlying commodity and represent an agreement to exchange an amount of copper at a defined price on a specific date. There are two different copper futures markets that you can trade with IG: High Grade Copper and Copper.

• High Grade Copper: is the copper futures market for the COMEX division of the New York Mercantile Exchange. COMEX copper can also be traded spot, at the current market price, although it’s usually traded as futures contracts, which are priced in cents per pound
• Copper: this is the copper futures market for the London Metal Exchange (LME). Like high grade copper, LME copper can be traded spot, but it most commonly traded as futures contracts. LME futures contracts are priced three months in advance, quoted in US dollars and sold in lots of 25 tonnes

Instead of trading commodity futures themselves, you could opt to trade an ETF that tracks the price of copper futures contracts, such as the WisdomTree Copper, which is designed to track the Bloomberg Copper Subindex.

An alternative way to gain exposure to copper is through the shares of companies involved in the mining and production of copper, such as Glencore, or through mining stock ETFs, such as the Global X Copper Miners ETF.

Decide how you want to trade copper

Once you have decided which copper-linked asset you want to trade, you need to decide which financial instrument you will use to trade it.

Most copper markets are priced using copper futures, rather than copper bullion. This means that copper futures are among the most popular trading instruments in the industrial metal market, which creates high levels of liquidity and volatility. But futures contracts do have an expectation that the physical copper will be delivered, unless the contract is rolled over, which can be a problem for some traders.

One of the most popular ways to gain exposure to copper is through derivative products, which enable you to speculate on the price of copper without ever having to take physical ownership of the metal. Although copper futures are a derivative in themselves, it is common practice to use other instruments to speculate on the price of the copper futures markets. These include:

• Contracts for difference (CFDs): when you trade CFDs, you are entering into an agreement to exchange the difference in the price of the asset from when the position is opened to when it is closed
• Spread betting: when you spread bet, you are placing a bet on whether the price of the asset will rise or fall

The profit or loss to your CFD and spread betting positions will depend on how far the market moves in either direction – if your prediction is correct, your trade could make a profit, but if you are incorrect, you will make a loss.

Both spread betting and CFDs are leveraged products, which means that you are only required to put down a fraction of the full value of your position in order to gain full market exposure. While leveraged products do magnify your profits if your prediction is correct, if the market were to move against you, you could face magnified profits.

Create a risk management strategy

Copper trading does carry risk, especially if you decide to trade using leverage, which makes it important for you to create a strategy that will help manage risk and protect your trades.

You can mitigate the risk of trading copper by attaching stops and limits to your positions. Not only do stops enable you to define the level that you want to close your trade at, but limits can help you to lock in profits by setting a level to realise your profits at.

Open and monitor your first copper trade

Once you have established what to trade, decided how to trade it and attached any risk management tools to your position, it is time to enter the market.

When you trade copper, you have the opportunity to take advantage of markets that are both rising and falling. You can do this by opening a position to ‘buy’ copper if you think the price will increase, or a position to ‘sell’ copper if you think it will decline. Your decisions about which direction to trade in should be based on the analysis you have chosen to perform and the copper trading strategy you have made.

Copper trading strategies

There are a variety of trading strategies that you can employ depending on your personal preferences and knowledge of technical indicators. But broadly speaking, copper trading strategies will depend on whether the market is trending or consolidating.

Copper strategies for trending markets

When the copper market is trending, it means that it is constantly reaching higher highs or lower lows. This will generally occur at the beginning and end of the copper market life cycle. When companies and customers are buying copper for production, the demand pushes the market price higher, whereas when construction projects are finished, there is often a slump in copper prices until the next cycle starts.

Traders seeking to match their strategy to a trending copper market will often use indicators such as moving averages and the MACD to identify buy and sell signals.

Copper strategies for consolidating markets

Consolidating markets are range bound, instead of reaching different price extremes, the market remains within support and resistance lines. This tends to happen during periods of equilibrium between supply and demand pressures.

For example, copper was rangebound for the entire month of May 2018, between $2.95 and $3.21, due to trade tension between the US and China.

When markets are consolidating, traders tend to favour using historical levels of support and resistance to identify points of entry and exit within the price range. This copper trading strategy would involve buying copper at a known support level and selling when it reaches a point of resistance, taking advantage of shorter-term market movements.

Copper trading hours