Trade idea background
The divergence between the two types of coffee futures has been quite interesting this year. Arabica (symbol: KC), the bigger and better-known market, has been moving down for a long time in a smooth trend. Arabica has been a great source of income for trend followers because this is the kind of trade we love to see: a seemingly never-ending trend. One trend like that pays for quite a few false breakouts.
Robusta coffee, however, has been much more volatile. It, too, has been in a negative trend for a long time, but has been more prone to brief rallies along the way. The temperament of Robusta makes it a better candidate for counter trend trading. Since we're in a long-term negative trend, the main game is to short the rallies. At the moment, such a rally has just occurred.
This Trade Idea is based on a quantitative counter trend-trading model, which is designed to enter positions in the direction of the main trend while fading short-term counter moves. In this case, we have a long-term negative trend and a strong short-term rally. The model will then enter a position, placing a firm stop in the market as well as two different price targets. Half of the position is closed on each target. If and when the first target is hit, you've got a break-even situation on the trade. If and when the second target is hit, you lock in profit.
Trade management and risk description
The current contract is January 2014. That's ticker LRCF4 or RCF4 depending on your market data system. Place the stop and targets in the market for a fire-and-forget solution.
Trade idea parameters
Entry: current price level is about 1664. Sell open around here.
Stop: stop out at 1718.
Target: first target at 1576. Second target at 1541. Close half of the position on each level.
Time horizon: average holding period for this model is about two weeks.
Long-term Robusta coffee, back-adjusted futures continuation
