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10 Rules for Coffee Trading

This list is adapted from observing one of my mentor's trading styles. Normally, I mention it as part of the Trader Mindset Lecture of my Coffee Trading Course, but I thought it was worth sharing here and elaborating a bit more on it.

Let me know any others that I should add to the list!

1. Bom Dia! (Know Brazil, Know the BRL)

Brazil is the world's largest producer of coffee, and therefore it is essential to know what is going on with this origin: what production is, what the weather forecast is, what phase of the harvest they are in, what the differentials are and what is happening with logistics.

In addition to knowing what is happening with coffee in general, we also have to remember that Brazilian exporters and farmers are often hedging in BRL terms so we need to know what is happening with the BRL.

2. Brazilian Farmer is Smart

The Brazilian coffee industry is a mature industry, and the Brazilian farmer was not born yesterday. They are well capitalized, they have Bloomberg terminals, they subscribe to professional reports, and they have seen the impact of the Brazilian coffee crop on the global market over generations.

Moreover, because the vast majority of Brazilian coffee is naturally processed, the Brazilian farmer can afford to wait for the price of their choosing to sell.

3. Trade the Fundamentals

The coffee market does not have the benefit of a USDA report or a universal agency that provides the one-true-answer for the fundamentals. If you want to have any kind of edge in coffee, you have to know the fundamentals. This begins with understanding the biology of the plant and it ends with stocks to use ratios.

4. The switch will reflect the Fundamentals (In Arabica)

The calendar spreads in Arabica are difficult to manipulate because the exchange is very strict with position limits. A carry market is not necessarily bearish, but an inverted market is always bullish. Trading spreads between crops will often reflect the fundamentals better than the outright.

5. Surf’s Up Dude! (Ride the Wave)

Cowabunga! When coffee is in a wave, ride it. Sometimes the fundamentals are less important than just going with the flow. If the market is in a bull or bear run, ride it while you can.

6. Scale in/Scale Out

If you pull the trigger too soon, you can get it beat up pretty bad. Too late and you can miss out entirely. Putting a little on now, and adding to it on a scale is not only a good money management technique, it will also help you to manage your emotions.

7. You don’t have to Dance every Dance

There will be moves that you miss. If you miss out on a move, sometimes its better sit back and learn from what is happening, rather than get in late and be the last one to the party.

8. Follow the Certs

As the tenderable supply, the certified inventory is the most directly relevant stocks to price. There is layers of information in the certified stocks to unpack. The aging penalties will dictate drawdown. The origins indicate tenderable viability. The pending stocks and pass rates indicate the direction of stocks.

9. Fade the Wings (Sell Far-Out, Unlikely Options)

You have to pay the bills somehow. When there is no trade to be had, selling low risk options can help to keep the lights on. If you are well connected to Brazil and the fundamentals, you won't often be surprised. If you are surprised, you can react quickly and have room to act.

10. It’s Ok to be Wrong, so Long as you are Sufficiently Right

You don't have to be right every time. You can be wrong more often then right. But when you are right, you have to make sure it is worth your while. Risk/Reward ratios will guide you in this. If you are risking 1 to make 3, then you can be wrong twice as often and still break even.

That's all I've got! Please let me know any coffee trading rules that I'm missing or that I should add!

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