HardAssetsInvestor

Written by Robert Levin  |

July 01, 2008

Investor In The Woods: Talking With A Broker

Details

In the second installment of HAI's new column,
a commodities broker discusses the human
foibles driving many trading decisions.

• The factors impacting decisions
• The broker-client relationship
• Do brokers have a legitimate role?

 

Commodities trading, an incredibly complex process by many accounts, really boils down to three simple words: predicting the future.

But figuring out the quality of next winter's Florida orange crop, the size of next spring's cotton harvest or the price of crude oil six months from now is by no means a simple thing to do.

In a recent interview with commodities broker Chuck Hackett, co-founder of Access Futures and Options Trading of Woodlake, Calif., I got a taste of a few of the complicated variables that influence the day-to-day predictions that futures traders make.

The process begins simply enough. Electricity, computers and telephones power the system, and the strength of the mind carries the rest.

"If you're day trading, you try to identify an area where the price is going to move to and try to capture that movement," Hackett said, whatever it is that you're trading. "The price bars all look the same on the screen, and since they're all viewed by humans, they're all going to follow human patterns."

There's a variable in those patterns that keeps cropping up, however, and one even less predictable than weather, politics, labor strikes and other unknowns: that pesky thing called human emotion.

Whether a trader studies the fundamentals of supply and demand or makes a play based on the pure movements of numbers over time, they will always face shifts in the market that begin, grow and disappear because of emotion. Investors, brokers and producers are all subject to it - the most human of traits.

"There's a lot of stuff that makes no sense at all out there that people do," Hackett said. "There are things that take on a life of their own. Self-organizing ideas that have their own product."

The Media's Role

Brokers know this. And they try to factor it in. But the public is often under a different impression, because with a 24/7 news cycle, people have grown used to having everything explained, and the media is basically compelled to follow suit, Hackett said.

"If the media tells them that oil is going up, people have to know why. And the reason doesn't have to be right or even remotely correct," he said. "A lot of times, there's no reason that can be identified at that point as to why something took on a life of its own to do something."

Except that people do things for reasons that they might not even be aware of. Self-defeating reasons that sometimes don't have a thing to do with making money, but everything to do with working out some kind of subconscious issue or another, Hackett said.

It is the case with commodity traders more than one would think. And to be successful as a broker, he finds himself delving deep into the psychology of his clients, trying to figure out what's motivating them and how he can steer them in the right direction, while still letting them have the final say.

"The broker-client relationship can be as intense as any psychiatrist-patient relationship," he said. "So, you really have to acquaint yourself with human nature in its various guises to understand how people relate to their money, and why they get into the market. Often it's not to make money, on a much deeper level."

People who get into trading may be guys with fading athletic prowess looking for a second youth. Or thrill seekers, jumping from ever-higher cliffs into the swirling pools of futures options. "And the demographics of most traders fall right on the midlife crisis line, and that's not the best time to be making decisions," Hackett said.