The old joke goes: if you want to get a million dollars trading coffee, start with two million. (In other words, the only thing that's easy about trading coffee is losing money).
I get a lot of inquiries from people who are interested in getting started on trading coffee. It makes sense, coffee is exciting! Just this year, Coffee reached record highs in absolute dollar terms and fortunes have been made and lost. That kind of volatility is enticing, and it explains why people have been saying for years, “coffee is the 2nd most commonly traded commodity after oil.”
So, if you are one of those people who would like to trade coffee, but don’t know where to start, this is for you!
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Now my future coffee trading friends, I’m going to divide you into 3 groups: 1) amateur speculators, 2) professional speculators and 3) industry professionals.
I will provide advice for each of these three groups on how to get started and what the reward potential is.
Amateur Specs
First let’s see if you are in the right group. If you are an amateur speculator, you probably have some other career or are retired and are looking at making a bit of extra money on the side. You are smart, maybe you made some money trading stocks or the "c-word". You feel pretty confident that with some money, intelligence and hard work you can make some money in coffee, maybe even have some fun while doing it.
Well, if this sounds like you, let me start by throwing some cold water. If you want to trade coffee as a hobby, throw out any plans of making money.
Do not plan on making any money from coffee trading in the foreseeable future. Do not plan on using the money from coffee trading for retirement income, nor supplemental income, nor anything else important. If you are starting out coffee trading as an amateur, the only thing you can count on is losing money.
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The odds are heavily stacked against amateur traders, they have zero advantages in the market, and multiple (and significant) disadvantages. The odds of success are slim to none.
This is not a tough-love, “hey you have to be a go-getter to make it.” I’m telling you bluntly, if you want to make money, there are 1,000 easier ways to make money than coffee trading.
This is not a pitch for my classes and research either. In fact, I advise amateurs not to take my class because it is expensive, and they likely will not have the resources to succeed anyway. I train professionals in their craft; I don’t sell hopes and dreams to amateurs.
I will still give you my best advice if you decide to trade anyway but consider yourself warned that this is a terrible idea.
With the warnings out of the way, there do seem to be some people who are successful amateur traders. This is the tiny and unusual minority. [A 40 year-old amateur tried out for the NFL and went on to win the super bowl as a quarterback, but that doesn't mean it's a realistic career path for most 40-year-old amateurs.]
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Start Small, Scale Up Slowly
If you want to trade coffee as an amateur, the most important advice I can give you is this: start small.
One of my mentors described trading coffee like this, “someone has to pay your tuition.” What he meant by that was, “you’re going to lose money trading coffee, and whoever you are working for is going to eat that loss.”
When you trade for your own book, you are paying your own tuition, so-to-speak, and that is expensive. One Arabica future moving against you by 1c will cost you $375, so if you have a 3c stop loss (very tight, perhaps unrealistically tight, in today’s market), that will cost you $1,125 per loss on a single future.
When you are learning to trade anything, the idea is to learn how to gauge the odds correctly. Since the outcome of any given trade is binary (either win or lose), it is impossible to tell the accuracy of your estimation of the odds on a single trade.
It is only possible to understand if you are accurately representing the odds through repeated trades. So, you make your assessments, and then trade 10-12 times, and this will give you a reasonable idea if your assessments are accurate.
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For example, if you decide only to take trades that have a 70/30 chance of winning, and you trade 10 trades and win 6 – 8 times, it is reasonable to conclude that your estimations are accurate. You still may have just gotten lucky or unlucky though and only trading many dozens of times will you start to gain real confidence in your accuracy.
Stick to the Basics
It is highly unlikely that you will come up with a unique and also winning trading system as an amateur. However, it is possible that there are some trades that are so obvious that even an amateur can spot them.
As an amateur, you are not going to be the first person to get in on a good trade. The hedge funds with big research budgets, and the tradehouses with on-staff meteorologists and agronomists will be first. However, you could potentially get in a few days or a week later, and take a modest profit.
In coffee trading, and really all commodity trading, sticking to the basics is what we call “the fundamentals”, or supply and demand.
Trading on supply and demand is very difficult because while the market tends to move towards bullish prices in tight S&D and bearish prices in a loose S&D, there can be quite a bit of volatility before we reach there.
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This presents a major challenge because you can be correct on the S&D, but potentially still get knocked out of the market due to capital flows or currency fluctuations.
What about Technical Analysis?
A lot of amateurs love technical analysis because it offers clarity. You buy here, you sell there, you profit. I would strongly recommend against trading purely technicals as an amateur.
Any technical analysis that you can learn in your spare time in a couple of years, puts you in the bottom 5% of skilled technical analysts out there trading the market. Its fine to learn some technical analysis to supplement your trading skillset for the long term, but technical analysis provides a seductive certainty to your trading that does not bear out in your profits.
If you want to trade purely technical analysis, that is perhaps a better career path (only marginally) then trading purely coffee, but if your goal is to trade based purely on technicals than you will need to trade a wide variety of assets and not one only.
Final Thoughts on Amateur Coffee Trading
Coffee trading (and all commodity trading) is a zero sum game. That means for every winner, there is a loser. This puts new traders at a major disadvantage because you are swimming with sharks.
Those who do not have the intellectual capacity, the market knowledge, or the financial pockets to be able to trade profitably are quickly ejected from the market. This means that the majority of those who remain trading are people who are good at winning trades.
This makes it an extremely tough environment to learn in, as you have to immediately start competing at the highest level of difficulty. The fact that many amateurs are learn to trade on a part-time basis, adds another uphill battle. The people that you are competing with are trading full-time.
Therefore, one of the best pieces of advice I can give you about trading coffee is this: if you are dead-set on trading coffee, you’re best off looking for a full-time opportunity.
There are two full-time pathways to trading coffee that we will cover in the next articles: Professional Speculators and Industry Professionals.
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