Coffee Trading Tips

Coffee futures can make wide swings within each trading day. The extreme price variance makes coffee dangerous to trade on a short-term basis unless you can devote the time to monitoring the markets throughout the day. You also have to be disciplined, control your risk and get out of the market quickly if the trade doesn’t work. Taking profits at your objectives is critical, as the market price can turn very quickly.

I prefer trading coffee from a longer-term horizon. This means looking for bigger moves in coffee over a matter of weeks, as opposed to trying to day trade the coffee futures market.

Sometimes, I will take quick profits if the market makes a windfall move. However, it makes sense to look for larger moves that have a profit ratio of three to one or risking one dollar to make three.

 One of the best ways I have found to trade coffee is to sell options instead of using futures contracts. Coffee options typically have a large amount of premium in them because of the market’s penchant for wide price swings. Options can work well in this market because they give you some cushion to withstand the volatility. For example, you can sell a put option instead of purchasing a futures contract. It is important to realize that selling options also carries risk similar to a futures contract. For those that do not trade in the futures market, the JO ETN product has a high degree of correlation with the price action in the coffee futures market.

There are many opportunities to trade coffee, but you have to be careful and disciplined. This means doing your research and have a trading plan. It also means cutting losses quickly. I would recommend following the market for a period of time, instead of jumping in on day one. The ETN product could be ideal for longer term trading positions as it carries less risk than futures or options. While the ETN can be volatile, it does not have the same degree of leverage as futures and futures options contracts.