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The Coffee Futures trading game: basics of investing

From the May 2011 issue.

As coffee prices reach new highs, interest in Coffee Futures is also ramping up. Phillip Capital's Avtar Sandu explains the basics.

Avtar Sandu, Phillip Futures’ Senior Manager – Commodities in Singapore explains the machinations of the market.

Trading in coffee futures kicked off in 1882 with the launch of the Coffee Exchange in the City of New York. Since then, exchanges offering coffee futures for trading have mushroomed all over the world. Even though trading in coffee futures is within the grasp of all in the coffee industry, not everyone considers futures trading as a tool to augment their trade. Futures trading requires research, capital and an understanding of markets in order to consistently profit from trades. And, as it functions through a large leverage, downside risks exists and this had put many off looking at futures and options. Despite this, trading in coffee futures and option contracts has gained added interest with the rally in coffee prices. The most active contracts traded are the Arabica variety traded on the ICE-NYBOT Coffee “C” contract traded in New York and the NYSE-LIFFE Robusta coffee contract traded in London.

Although trading techniques on these exchanges varies, traders broadly fall into a few categories. They are either fundamental traders who focus on supply, demand, ending stocks and weather issues or they are black box traders who rely on algorithms to predict the markets. Others are spread traders who profit from differentials between contracts and a large portion are traders who try to pinpoint and interpret trends and market direction with technical analysis tools. These tools are used by these investors as a means of understanding coffee market workings which than enables them to project market movements and capitalise on opportunities.

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