Coffee Futures Trading Basics

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Trading Coffee: From Coffee Stocks to Coffee Futures—Your Complete, Step-by-Step Guide to Coffee Trading

From Coffee Stocks To Coffee Futures Discover Step-By-Step How To Trade Coffee

This Book Is The Ultimate Guide To Coffee Trading

In this book, youll learn how the coffee market works and how coffee differs from other commodities. Youll learn about the key factors that drive the price of coffee. And youll be takenstep-by-stepthrough several ways to trade coffee from From Coffee Stocks To Coffee Futures— Discover Step-By-Step How To Trade Coffee

This Book Is The Ultimate Guide To Coffee Trading

In this book, you’ll learn how the coffee market works and how coffee differs from other commodities. You’ll learn about the key factors that drive the price of coffee. And you’ll be taken—step-by-step—through several ways to trade coffee from purchasing stock in coffee companies to advanced instruments like futures and options.

Here are some of the specifics you’ll learn.

– How the coffee market works including the countries and companies that are key players– Chapter 1

– The 5 key factors that drive the price of coffee– And how to use them to your advantage– Chapter 2

– Why coffee is a very strange commodity with a very inelastic price (and what it means to you as a commodity trader)– Chapter 2

– Top performing coffee stocks and how to get started purchasing stock in coffee companies– Chapter 3

– Step-by-step how to setup a brokerage account and start trading coffee futures– Chapter 4

– The concept of a “margin account”– What it is and how it allows you to make massive coffee trades with only a small amount of money– Chapter 4

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– A rapid-fire list of tips, techniques and pitfalls to avoid when trading coffee futures– Chapter 4

– How to trade coffee options, including a detailed example– Chapter 5

– The 2 main types of coffee equity traded funds– Chapter 6

Fun with Futures: Basics of Futures Contracts, Futures Trading

At first glance, futures trading may seem complex. Let’s explore what goes into trading futures contracts.

Key Takeaways

  • Futures contracts have standardized delivery terms
  • Futures market participants include professionals looking to mitigate risk and speculators looking to profit from price movement
  • Buying or selling a futures contract requires the posting of margin sufficient to cover potential losses

At first glance, the futures markets may appear arcane, perilous, suited only for those with nerves of steel. That’s understandable, as some tend to be more volatile in price than many traditional stocks and bonds.

But we often fear what we don’t know. Many futures contracts—such as those based on crude oil, gold, soybeans, and more—have origins quite literally at ground level (or below ground). What futures markets do over the short- and long-term can tell investors a lot about what’s going on in the world (how much it will cost to fill your gas tank before your summer road trip, for example).

Understanding how futures markets work, and perhaps even trading futures at some point, starts with some basic questions. What are futures and how do you trade futures? Let’s explore.

What Is a Futures Contract?

A futures contract is a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Typically, futures contracts are traded electronically on exchanges such as CME Group, the largest futures exchange in the U.S.

Most futures contracts are “standardized,” or effectively interchangeable, and spell out certain specifications, including:

  • Quality and quantity of a commodity
  • Unit pricing of the asset and minimum price fluctuation (tick size)
  • Date and geographic location for physical “delivery” of the underlying asset (but actual delivery rarely happens, as most contracts are liquidated before the delivery date)

For example, a December 2020 corn futures contract traded on CME Group represents 5,000 bushels of the grain (trading in dollars per bushel) to be delivered by a certain date in December 2020. Crude oil futures represent 1,000 barrels of oil, and are quoted in dollars and cents per barrel.

Who Trades Futures Contracts, and Why?

According to Adam Hickerson, Manager, Futures and Forex, TD Ameritrade, “Futures have such a robust market. There are so many different parties and individuals trading futures, who combined provide access to deep liquidity, making it easier for all participants to conduct business and trade.” The first group of traders are commodity producers and processors (aka, “commercials”) such as oil companies, grain millers, and precious metals miners. There are also speculators, such as big banks, hedge funds, and individuals who trade for a living along with retail traders.

The various market “players” have their own motivations for buying and selling futures—say, a grain processor that wants to “hedge,” or protect, against the prospect of a severe summer drought in the farm states of the U.S. Midwest that could send corn and soybean prices soaring.

Speculators, meanwhile, aim to make money—to “buy low and sell high” (or vice versa). Just like in the equities markets, speculators are looking to capitalize on the price fluctuations of the futures contract. They’re trying to turn profits on price moves.

Both commercials and speculators are essential to generate the necessary liquidity for properly functioning futures markets. They provide ample numbers of willing sellers for willing buyers. (A similar principle applies in stock and bond markets.)

What’s the History of Futures and How Did They Evolve?

Early versions of futures contracts have been traced back to rice markets in Japan in the early 1700s. But futures trading as we know it today began around 1848, when a group of grain merchants established the Chicago Board of Trade (CBOT).

A few years later, the CBOT established the first recorded “forward” contract—a predecessor of the futures contract—based on 3,000 bushels of corn. CME Group has since purchased the CBOT and several other exchanges over the past decade.

Why did futures take root in Chicago? The city’s location in the middle of the nation’s breadbasket made it a convenient place for buyers and sellers to meet.

“Farmers raised livestock and grew crops and other agricultural commodities and brought them to market to sell to commercial entities,” according to MarketsWiki, a derivatives market database. “Substantial risk existed on both sides of that process. Buyers were vulnerable to the delivery of substandard products, or no products at all if the growing season had failed to produce enough of the commodity.”

Buyers “needed a way to ensure that the quantity and quality of commodity they needed would be available when they needed it. Farmers needed a way to know that a glut of available crops would not put them out of business.”

What’s the Role of Futures Exchanges?

Exchanges provide a central forum for buyers and sellers to gather—at first physically, now electronically. For the first 150 years or so, traders donned colorful jackets, stepped into tiered “pits” on the trading floors of the CBOT and other exchanges, and conducted business by shouting and gesturing. Today, so-called open outcry trading has largely been replaced by electronic trading.

Exchanges play another other important role in “guaranteeing” futures contracts will be honored; many exchanges operate “clearinghouses,” which serve as backstops or “counterparties” in every trade. The basic idea is to reduce or eliminate counterparty risk and ensure confidence in the markets.

What About the Role of Margin in Futures Trading?

In the equity markets, buying on margin means borrowing money from a broker to purchase stock—effectively, a loan from the brokerage firm. Margin trading allows investors to buy more stock than they normally could.

Margin works similarly, but is different in futures markets. When trading futures, a trader will put down a good faith deposit called the initial margin requirement. The initial margin requirement is also considered a performance bond, which ensures each party (buyer and seller) can meet their obligations of the futures contract. Initial margin requirements vary by product and market volatility and are typically a small percentage of the notional value of the contract.

An individual or retail investor who wants to trade futures must typically open an account with a futures commission merchant (FCM) and post the initial margin requirement, which, in turn, is held at the exchange’s clearinghouse.

If prices move against a futures trader’s position, that can produce a margin call, which means more funds must be added to the trader’s account. If the trader doesn’t supply sufficient funds in time, the trader’s futures position may be liquidated.

Learn to Trade Futures

TD Ameritrade offers a broad array of futures trading tools and resources. Trade more than 60 futures products virtually 24 hours a day, six days a week.

The Basics on Futures Trading

To better understand how futures are traded, it is helpful to know what a future is, the history behind them, and the benefits of trading them in addition to the trading process. A ‘future’ is an evolved financial contract to buy or sell an underlying commodity or product at a future time. Futures are exchanged through authorized clearinghouses such as the Chicago Board of Trade and must be exercised on a pre-determined date called the ‘final settlement date’. The exchange of futures contracts is regulated by the Commodity Futures Trading Commission and requires the use of credit to the contract purchaser and has less risk than a similar contract called a forward. Since futures contracts and prices are derived from a product or commodity they all called derivative securities. Speculators often buy and sell these contracts with the intent of making a profit off price fluctuations before the delivery date, however they are also used to by farmers and agriculturalists to hedge farm operating costs, and product sale prices such as those associated with animal feed and grain prices.

The History of Futures:

Modern day futures trading evolved out of a forward trading system which was used in the mid 1800’s as a way for farmers, bankers and merchants to collaborate their interests financially. A forward contract is an agreement between two or more parties to deliver a specific product on a specific date in the future. These contracts are different from futures in that they don’t have to be traded using an exchange and the settlement of price is determined by delivery of the product rather than the final settlement date. One of the largest exchanges through which this process took place was the Chicago Board of Trade, which was called The Board of Trade of the City of Chicago in the 1840’s. Over the following 30 years after 1840, futures trading which occurred through the exchanges became more regulated and standardized allowing the futures exchange to become more reliable and standardized. Eventually, in the 1970’s a fixed market related to, but separate from the actual underlying commodities emerged in which financial instruments such as bonds and foreign currency could also be traded using futures contracts.

The Trading Process:

Futures are traded using ‘margin’ which is a financial term for a credit account with a minimum down-payment or collateral. This margin amount is usually between 5-15% but may go much higher. A speculator or trader buys a futures contract through an exchange and/or a broker who works through the exchange and does so at a fixed cost of the underlying security. If the price of the underlying commodity or financial instrument rises during the term of the futures contract, the contract holder can make a profit. However, if the price falls, a loss will be incurred. During each day the buyer of the futures contract continues to hold it, the profit or loss is recalculated. Speculators in futures trading sometimes use a trading strategy using technical indicators and other financial tools to aid them in their decision making. A step by step process of trading futures is as follows:

1. Use a reliable brokerage house that works through an exchange that trades futures

2. Choose a commodity or financial instrument to trade in such as coffee or currency.

3. Study the different contracts, the costs and goods

4. Develop a trading strategy

5. Purchase the Futures contract and hope steps 1-4 work.

Why Futures are Useful:

Futures contracts are useful because their derivative nature affords them the ability to represent advanced securities transactions, products and financial instruments through a systematized trading environment. In other words, they greatly facilitate commercial trade. Some of the ways they do this are as follows:

1. Control price risk fluctuations by locking into a fixed price

2. Assist companies in generating capital in advance of sale.

3. Demonstrate buyer and seller predictions of future prices.

4. Assists observers with assessing economic and market conditions through price efficiency theory.

5. They can be used across many markets including currency, bond, equity index and commodities markets.

Who Invests in Futures and Why:

Futures are traded by farmers, agriculturalists, financial institutions and speculators. While all have a financial interest in the contract, they may have different reasons for entering into the contract. In the case of ‘hedging’ for risk , farm managers and crop farmers attempt to bring a more stable cost and selling environment to their operations through locking into a futures contract price they think is fair. For speculators and financial institutions however, the purpose of the contract is different. For these latter two participants, the intent is profit. These latter two generally do not intend to exchange the underlying commodities but rather the money for them and hopefully at a profit. Since the clearinghouse assumes the cost of the commodities they take responsibility for the cost of the commodities and can re-sell the contract.

Conclusion:

Futures contracts are financial agreements to buy or sell an underlying commodity at a fixed price on a settlement date. While the actual commodity need not be exchanged, this does happen as the futures market has evolved out of an actual commodities exchange system. The currently futures market is currently very sophisticated, and takes place through traditional trading and electronic exchanges that are regulated by Commodity Futures Trading Commission (CFTC). Futures contracts have the potential to be costly especially if the price of the commodity drops rapidly within a short time period. However, the contract may also be profitable if exercised at a profit. Futures contracts have a history in the commodities trade of farm products but have expanded to include metals, energy resources and financial instruments such as currency and bonds.

Coffee Futures Trading Basics

A future is a type of security that grants the trader the right to buy or sell something at a fixed price on a specific day in the future. That something is normally a commodity like gold, corn, crude oil, bonds, international currencies, or major market stock indices. Futures prices are derived from cash markets which is why they are called a derivative.

Futures are traded by three main groups of traders:

The first is large commercial traders who buy and sell futures to hedge and lock in prices for commodities they produce to use in their operations. Someone who grows coffee might want to lock in a high price at harvest time by selling a futures contract, and Starbucks might want to hedge their costs at lower prices to better manage their budgets and expenses by buying a futures contract.

Large speculative traders are the second group of futures market participants – trading on the direction of prices. Commodity trading pools are an example of a large futures speculator.

Small speculators are the third group, retail traders like you, also trading on the direction of prices.

Futures are traded on various exchanges throughout the United States and internationally, the largest of these exchanges is the Chicago Mercantile Exchange (CME). As a retail trader, keep in mind most futures markets are dominated by the commercial traders, accounting for 75 to 90 percent of all futures trading volume. Futures are generally traded in a separate futures account with a futures broker dealer.

Each futures contract has unique contract specifications, it is important you research the specifics of each market you want to trade. Each futures contract has an expiration date of when buyers and sellers must notify the exchange if they are going to take delivery of the commodity represented by the futures contract.

To trade any futures contract, traders are required to put up a good faith deposit called margin, which sets aside money in your account in the event of losses. For example, to trade one crude oil contract would require $5,000 of margin in order to control 1000 barrels of crude oil. A crude oil futures contract represents 1000 barrels of crude oil which has a value of approximately $60,000 (1000 X $60 per barrel). Each full 1-point move is $1000 profit or loss per crude oil contract. Day traders who do not hold their position overnight get a reduced margin rate of 12.5 to 25 percent of the overnight rate.

Learning which futures to buy or sell and when to buy or sell, when to hold your position and when to close your position requires knowledge and experience you can gain through education and coaching.

Why Trade Futures

Futures offer a number of advantages over trading stocks or other financial instruments.

Diversification – Generally, when the stock market goes up or down, most stocks go up and down along with it. At times, traders can experience wide swings in your account value, especially if your stock portfolio is weighted heavily on one side of the market when the market is moving in the opposite direction. By trading futures uncorrelated to the stock market, you can help reduce your portfolio’s volatility and overall risk.

24-Hour Liquid Markets – How often have you seen a news event after market hours or over the weekend and wished you could trade that news before the stock market opens on Monday? Many futures markets trade 24 hours a day six days a week starting on Sunday night through to Friday’s close. Futures are also very actively traded, and the large number of traders generally ensures tight bid-ask spreads, fair transparent pricing, and large trades can be executed without wild price fluctuations.

Leverage – Futures are traded on margin which allows you to control a large dollar value of a commodity or stock index for a fraction of its value. This can result in much greater profits than could be gained without margin. With margin also brings potential for larger losses if the trade moves against you. Always have appropriate risk management in place to guard against a big move against your futures position. It is always possible to lose much more money than the initial margin required at the start if the market makes a big move against your position.

Tax Benefits – Futures traders benefit from a more favorable tax treatment than short-term stock traders; 60 percent of futures trading profits are taxed as long-term capital gains regardless of how long the trade was opened, and the remaining 40 percent of profits are taxed as short-term capital gains. Currently the maximum long-term capital gains rate is 15 or 20 percent, and the maximum short-term capital gains rate is 37 percent. Always check with your tax professional for the current tax rates and how any trading will affect your tax return filings.

Pure Market ExposureA stocks or ETFs trader seeking exposure to crude oil would have a number of challenges. Oil refining stocks are highly diversified beyond crude oil, an Exchange Traded Fund (ETF) like USO uses futures and swaps to create a crude oil price proxy and often these instruments do not directly reflect the price action of the crude oil market. On the other hand, the crude oil futures trader receives pure exposure to the crude oil market. Each crude oil futures option controls one crude oil future made up of 1,000 barrels of West Texas Intermediate crude oil.

What You Need to Know About Trading Futures

Trading futures requires you learn how to trade futures, learn about the markets, learn what drives futures prices, and learn how to decide which futures contracts to buy and sell.

Experienced futures traders always have a plan before entering a trade. This plan includes how many contracts to buy or sell, how much risk they are willing to take, how much money they are willing to lose on a single trade and a price level to take profits.

Understanding how futures trading works is a key factor to consistent trading and avoiding mistakes. Each type of futures contract has its own unique contract specifications which you need to fully understand – futures can trade at odd times during the day, each future has both a specific and unique last trading day and expiration day, which can be different and each futures contract has a unique contract point value which determines the profit and loss of a position based on the price action.

Finally, you might have heard stories of the absent-minded futures trader who forgot to close his lean hogs positions and a truck pulled up a few days later to his house to deliver the hogs. Although I guess this could happen, most online brokers are looking out for you in these circumstances and will auto close positions before the delivery notice is required (but it is a funny story).

Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options or futures); therefore, you should not invest or risk money that you cannot afford to lose. Online trading is not suitable for all investors. View the document titled Characteristics and Risks of Standardized Options. Before trading any asset class, customers must read the relevant risk disclosure statements on our Other Information page. System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system and software errors, Internet traffic, outages and other factors.

Equities, equities options, and commodity futures products and services are offered by TradeStation Securities, Inc. (Member NYSE, FINRA, CME and SIPC). TradeStation Securities, Inc.’s SIPC coverage is available only for securities, and for cash held in connection with the purchase or sale of securities, in equities and equities options accounts.

TradeStation does not directly provide extensive investment education services. However, useful investment and trading educational presentations and materials can be found on TradeStation’s affiliate’s site, YouCanTrade.com, which is owned by You Can Trade, Inc., an investment education media company.

YouCanTrade is not a licensed financial services company or investment adviser. Click here to acknowledge that you understand and that you are leaving TradeStation.com to go to YouCanTrade.

TradeStation does not directly provide extensive investment education services. However, useful investment and trading educational presentations and materials can be found on TradeStation’s affiliate’s site, YouCanTrade.com, which is owned by You Can Trade, Inc., an investment education media company.

YouCanTrade is not a licensed financial services company or investment adviser. Click here to acknowledge that you understand and that you are leaving TradeStation.com to go to YouCanTrade.

You are leaving TradeStation Securities, Inc. and going to TradeStation Crypto, Inc. TradeStation Securities and TradeStation Crypto are separate companies.

You are leaving TradeStation Securities, Inc. and going to TradeStation Crypto, Inc. TradeStation Securities and TradeStation Crypto are separate companies.

You are leaving TradeStation.com and going to TradeStation Technologies, Inc.

You are leaving TradeStation.com and going to TradeStation Technologies, Inc.

TradeStation Securities, Inc. is an SEC-licensed broker dealer and a CFTC-licensed futures commission merchant (FCM), and a member of FINRA, SIPC, CME, NFA and several equities and futures exchanges, which offers to self-directed investors and traders Equities accounts for stocks, exchange-traded products (such as ETFs) and equity and index options, and Futures accounts for commodity and financial futures and futures options (TradeStation Securities does not offer Crypto accounts).

TradeStation Crypto, Inc. is neither a securities broker dealer nor an FCM, and offers to self-directed investors and traders cryptocurrency brokerage services under federal and state money services business/money-transmitter and similar registrations and licenses (TradeStation Crypto is not a member of FINRA, SIPC, CME, NFA or any equities or futures exchange, and does not offer Equities or Futures accounts).

TradeStation Technologies, Inc. is a software development company which offers analytics subscriptions that self-directed investors and traders can use to chart, analyze and design back-tested strategies for Equities, Options, Futures, Forex and Crypto markets (TradeStation Technologies is not a financial services company).

You Can Trade, Inc. is an online educational, news and entertainment media publication service that seeks to provide to the public a marketplace of potentially actionable investment and trading content, ideas, demonstrations and informational tools. You Can Trade is not an investment, trading or financial adviser or pool, broker-dealer, futures commission merchant, investment research company, digital asset or cryptocurrency exchange or broker, or any other kind of financial or money services company, and does not give any investment, trading or financial advice, or research analyses or recommendations, or make any judgments, hold any opinions, or make any other recommendations, about whether you should purchase, sell, own or hold any security, futures contract or other derivative, or digital asset or digital asset derivative, or any class, category or sector of any of the foregoing, or whether you should make any allocation of your invested capital between or among any of the foregoing.

TradeStation Crypto accepts only cryptocurrency deposits, and no cash (fiat currency) deposits, for account funding. In order for you to purchase cryptocurrencies using cash, or sell your cryptocurrencies for cash, in a TradeStation Crypto account, you must also have qualified for, and opened, a TradeStation Equities account with TradeStation Securities so that your cryptocurrency purchases may be paid for with cash withdrawals from, and your cryptocurrency cash sale proceeds may be deposited in, your TradeStation Securities Equities account. Therefore, if you want to open a TradeStation Crypto account, you must also have an Equities account with TradeStation Securities. This cash in your TradeStation Securities Equities account may also, of course, be used for your equities and options trading with TradeStation Securities.

TradeStation and YouCanTrade account services, subscriptions and products are designed for speculative or active investors and traders, or those who are interested in becoming one. No offer or solicitation to buy or sell securities, securities derivative or futures products of any kind, cryptocurrencies or other digital assets, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner endorsed by any TradeStation Group company, and the information made available on or in any TradeStation Group company website or other publication or communication is not an offer or solicitation of any kind in any jurisdiction where such TradeStation Group company or affiliate is not authorized to do business. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options, futures, futures options, or crypto); therefore, you should not invest or risk money that you cannot afford to lose. System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system, platform and software errors or attacks, internet traffic, outages and other factors. The trademarks “TradeStation®,” “YouCanTrade” and “SheCanTrade,” as well as other trademarks, domain names and other proprietary intellectual property of TradeStation Group companies, are owned by TradeStation Technologies. The proprietary TradeStation platform is offered by TradeStation Securities for Equities (including equity options) and Futures trading. TradeStation Crypto offers its online platform trading services, and TradeStation Securities offers futures options online platform trading services, through unaffiliated third-party platform applications and systems licensed to TradeStation Crypto and TradeStation Securities, respectively, which are permitted to be offered by those TradeStation companies for use by their customers.

Please also read carefully the agreements, disclosures, disclaimers and assumptions of risk presented to you separately by TradeStation Securities, TradeStation Crypto, TradeStation Technologies, and You Can Trade on the TradeStation Group company site and the separate sites, portals and account or subscription application or sign-up processes of each of these TradeStation Group companies. They contain important information, rights and obligations, as well as important disclaimers and limitations of liability, and assumptions of risk, by you that will apply when you do business with these companies.

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