Trading Cotton Futures for Beginners
Are you interested in trading or hedging Cotton futures? Cotton futures trade for over 16 hours per day starting Sunday evenings at 8:00 pm CST and closing at 1:20 CST daily. This gives participants from around the globe ample opportunity to place trades.
Trading Cotton on the Intercontinental exchange (ICE) offers market participants a safe and liquid market. With daily volumes in the tens of thousands of contracts traded and open interest above 100,000 contracts, there is plenty of liquidity to enter and exit trades.
There are 3 Main concepts beginners must understand before they begin trading Cotton Futures.
- Financial Risk
- Trading futures and options on futures involve substantial risk and may not be appropriate for everyone. It is wise to begin your journey with a experienced commodity broker and be sure to be honest and open about your risk appetite. Start small and understand how much you are willing to risk before you enter the trade.
- Trading in a margin account offers market participants leverage. A typical Initial Margin requirement is often 10-15% of contract value. This allows participants to save on capital deployment while participating in market fluctuations based on a full contract. This is a double edge sword, this type of account will magnify losses and gains, so start small and familiarize yourself with the market movements and how your account will fluctuate before trading bigger sizes.
- Physical Delivery
- Many commodity futures exist for commodity producers and end-users to hedge their goods they produce and use for their businesses. Sometimes market participants will want to offset their futures position by taking possession of the product or offset by getting rid of their physical to the counter party. This does not happen very often, and most futures positions are offset (liquidated) before First Notice Day. First notice day is 5 business days before the first delivery day of the spot contract month, which is the first business day of that month. This is another reason why you should work with a experienced broker when you are just starting out trading cotton futures. A good broker will always make sure your positions do not go past First Notice Day.
Once you grasp these 3 concepts you can begin to move into contract specifications. This is important to understand as you try to right size your trade. A Cotton Futures contract size is 50,000 lbs. This makes it easy for cotton producers and end-users to right size their hedges.
Price fluctuations are 1/100 of a cent (one point) per pound which is equivalent to $5.00 per contract.
Daily limits can range from 3 to 7 cents per pound ($1,500.00- $3,500.00). These can change based on the previous session’s price action.
Trading Futures is not for everyone. This is why as a beginner or novice traders should consult with a series 3 licensed commodity broker that has experience trading Cotton Futures.
Cotton futures can make major moves around Monthly WASDE reports that the USDA will update their estimates of Supply and Demand numbers for the Cotton crop. To get notified of these updates please be sure to subscribe to our free-market data updates. You will want to watch for the Sunday evening email “Market Preview” to make sure you are in the know for upcoming reports that effect the markets you trade.
Be sure to manage your risk. Trading Cotton futures is as much about managing your capital as it is developing a narrative as to what direction you think the market will go.
We like to present the utilization of options while trading cotton futures. Options can be used for locking in gains, minimizing losses, or putting on a defined risk strategy before a major market moving report. Options can be a saving grace between holding a position through tough times and having to bail on a position during a market correction.
Still interested in trading Cotton Futures? Reach out to one of our experienced, series 3 licensed commodity brokers at Paradigm Futures.
This material has been prepared by a sales or trading employee or agent of Paradigm Futures, and is, or is in the nature of, a solicitation. This material is not a research report prepared by Paradigm Futures. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.
DISTRIBUTION IN SOME JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW. PERSONS IN POSSESSION OF THIS COMMUNICATION INDIRECTLY SHOULD INFORM THEMSELVES ABOUT AND OBSERVE ANY SUCH PROHIBITION OR RESTRICTIONS. TO THE EXTENT THAT YOU HAVE RECEIVED THIS COMMUNICATION INDIRECTLY AND SOLICITATIONS ARE PROHIBITED IN YOUR JURISDICTION WITHOUT REGISTRATION, THE MARKET COMMENTARY IN THIS COMMUNICATION SHOULD NOT BE CONSIDERED A SOLICITATION. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that (Insert IB Name) believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.