Coffee futures trading can be very intimidating at first.  Coffee futures have a reputation for being extremely volatile, and its one of those commodities that has no daily limit for price movement.  Meaning there’s no limit to how much you could make or loose in a single day.  But for those beginners out there, lets break down this daunting world of coffee futures trading.

Coffee is now electronically traded on ICE.  One coffee contract accounts for 37,500 pounds of coffee.  So whenever coffee moves a cent, you arrive at the profit and loss figure by multiplying that cent by 37,500, realizing a profit or loss of $375.  If you are long coffee futures and prices rise 10 cents, you make $3,750.  Not too complicated. 

Where coffee futures trading gets exciting is the tremendous amount of leverage a futures contract has.  Most of us could not afford to buy a coffee contract outright.  At today’s futures prices ($1.20 per pound) an entire contract is worth $45,000.  Too rich for my blood.  Fortunately for those of us who want to join in the game, we can buy this contract on margin for a fraction of the value of the entire contract.  At current prices and volatility levels, you can control a coffee futures contract, accounting for 37,500 pounds of coffee, for about $3,000 on margin.  What does this mean?

If you own a single coffee futures contract, and the price of coffee rises only 10 cents, you have more than doubled your initial investment.  If on the other hand coffee prices fall 10 cents, you have lost more than 100 percent of your initial investment, unless you’ve placed a tight stop loss or hedged your position with a put option.  10 cents is a hiccup for coffee.  Coffee futures prices can move faster and farther than imaginable should the right news pop up, or should a series of stop losses get triggered.  This makes for a very risky and potentially very lucrative trading experience. 

At current coffee futures prices, and at current margin requirements, it would be unwise to trade a single futures contract in this market with less than $20,000 starting capital, or a good deal of experience with technical analysis and stop losses.  Coffee is a very difficult market to step into for the long haul without allowing for a good deal of price fluxuation.  Having a stop loss less than 10 cents below your entry point will create a high probability of getting stopped out on a small decline, which will shake you out of your position, and having a stop loss of greater than 10 cents gives a pretty poor risk to reward ratio.  So if you want to attempt coffee futures trading start by paper trading or taking small positions with strict adherence to your trading system.