Trading Coffee Price

Hi folks, I just wish to share some of my knowledge with yourselves on the topic of trading coffee price.

Here we are talking about the coffee futures market. There is a coffee cash market which is a separate consideration and not the subject of this article.

Coffee is a commodity, that is, it is a physical substance. Similar to such things as sugar or soybeans.

Trading a physical product does have some advantages, one of the chief advantages is that a physical product, unlike a company does not go broke. Those that trade futures commodities for the purpose of making money are known as speculators.

The supply and demand of the commodity is ever changing, which is reflected in the price. It is this price movement that the commodity/futures trader can utilise to generate income.

If supply goes up (or demand goes down) the price will generally fall. if supply diminishes (say crops wiped out by a storm) or demand rises then the price will generally rise.

As well as being described as a commodity coffee is traded on the US stock market as a futures contract. A futures contract is simply a contract where you are paying for the right to take delivery of the underlying commodity (coffee in this example) at a given time in the future. These delivery dates, for each commodity are previously defined. The delivery month is represented by a letter within the commodity symbol (each Futures contract has a different symbol).

If you plan to trade coffee price futures contracts then you would need a trading account with a broking service that allows access to commodities. The great advantage of trading a futures contract on something like coffee is the incredible leverage available. When you purchase a coffee contract you do not need to pay the full purchase price of the contract until the settlement of the contract. To hold on to the contract you only need to make a margin deposit, this amount is tiny when compared to the value of the coffee contract. This means for a very small price movement of the full sized futures contract can mean that the return on the margin amount invested can be quite substantial. For example a 5% rise in the underlying contract could yield something like a 100% return on the margin amount.

Futures contracts arose from the need for some certainty in the price of wheat. The first futures board is understood to have been started in 1848 and was known as the Chicago Board of trade. This also gave standardization of the contracts and the delivery dates.

The futures exchange allowed, through an auction like process, the buyer and seller to lock in the price for the future.

Today speculators also trade futures contracts to (potentially) make money. The futures exchange does not set the prices but provides a meeting place for the trading to take place. It also provides the necessary support staff to ensure operations and trading complies with the relevant regulations. This includes daily trading limits and minimum price fluctuations.

Speculators of course have no desire to take delivery of the underlying commodity (even if they do like a drink of coffee). Considering this a speculator should not trade the current months futures contract. Your broker will keep an eye on your open positions and will notify you as you get closer to the delivery date, and ask you to close out or get ready for delivery (do you really want 37,000 pounds of coffee?).

You of course can avoid this situation by ensuring that you are out of the trade well before the 'first notice day'.

As you do wish to be able to exit any positions quickly you should only trade the contracts with the most open interest (the number of contracts available).

The other consideration (which applies to all trading) is do not enter the market without a stop loss order. This is a good til cancelled order that is triggered if your trade as gone in the opposite direction to where you wished it to go. This allows you know and accept your loss prior to entering the trade.

Also ensure that prior to placing your trade you have an exit strategy for both the profit and loss situation. Entering the trade gives the opportunity but it is the exit strategy that determines our profit (or loss).

The above is only an introduction, to whet your appetite, on the topic of trading coffee price. Please ensure that you do your own due diligence and understand and accept the risk of your decisions prior to live trading.

Saturate yourself in your topic, paper trade your strategy prior to live trading and please understand that emotion has no place in the traders strategy. Keep your emotions for your family and loved ones.

Source : azinearticles