Trading Lumber Futures

Trading Lumber Futures

You gotta admit—trading lumber futures is just not as exciting or “sexy” as some of the other markets that traders are attracted to. You know, it would be a whole lot cooler for you to tell your friends how you’ve been trading the E-mini S & P or even Forex currency pairs of some sort. But lumber? Man, that sounds almost archaic. The only thing that traders can miss if they overlook or lightly esteem lumber futures is that there are some serious profit opportunities, but I will throw this caveat out there from the beginning: You can’t enter the lumber market all “willy-nilly”—you better have some solid capital management strategies, some good self-discipline, and a fine-tuned trading methodology before you step into this arena, because believe you me, many a trader has met their fate in one of lumber’s limit moves. True indeed, limit moves can happen in any commodity market, and if you’re on the wrong side of the limit move, you can surely get wiped clean out, but the reason why I even mentioned limit moves in lumber is because lumber is a rather illiquid market at times, and is prone to all kinds of erratic price action. Fundamentally speaking, lumber is inextricably tied to the demand for markets that require large amounts of lumber (pretty obvious), like housing for instance. Any time you see a boom in new housing construction, you better believe that the lumber market will respond with higher prices. This is a constant correlation to look for, and in many people’s minds, lumber futures prices are actually a solid economic indicator overall, as it can be a gauge to the demand for new homes and so forth.

Image courtesy of Google Images
Image courtesy of Google Images

Lumber Futures Trading

But it’s not just new homes that lumber becomes a “hot commodity” for, it’s also for rebuilding homes, such as can happen after a devastating hurricane or something similar. Unfortunately, this type of horrible situation can actually be a positive for lumber prices, due to the fact that people will need to rebuild their homes if they’ve been destroyed by powerful storms. During hurricane season, it’s not uncommon to see lumber prices spike due to either people needing to board up their houses in preparation for the hurricane(s), or use lumber for rebuilding after the hurricane(s). As far as the contract specifications, lumber trades under the symbol “LB”, and it is traded on the CME Group exchange. One futures contract represents 110,000 board feet of lumber of random lengths, which is basically a bunch of 2 x 4’s ranging from anywhere between 8 feet to 20 feet long. The usual size of cargo that’s representative of a contract of lumber is what it would take to fill up a 73 foot flat car. To simplify all the math, if lumber prices moved from 257.10 to 257.20 (a $0.10 move), that would equal a move up of $11.00 per contract. So if lumber moved up from 257.00 to 258.00, that would be a $110.00 move up, per contract. You can see now, especially with how erratic lumber prices can be, how easy it would be to rack up some serious loot by trading lumber futures, but again I say, do not even attempt to enter this market without some type of solid trading strategy in place, including your plans if the trade goes wrong—this means using stop-loss orders and making sure that you’re not being “cavalier” with a market that can truly chew you up and spit you out. Just some food for thought. 

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