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.
"Some people just like to keep rolling the dice regardless of what they do. They go on and on about how they want to make money, but the decisions speak for themselves."
Subconscious motivations affect producers as well, Hackett said. Real goods are what they are, but the people that grow, harvest, mine, refine, and ship them are all influenced by a unique set of factors. The structure of the companies they work for can even encourage the inclination to act on emotion, ego or other motivators that have little to do with business.
"When you have multiple plutocracies whose agendas are predicted by the dead hands of their past, but the people in there have to maintain their importance in the world, you have all kinds of strange outcomes," he said.
As a broker, Chuck Hackett finds himself wading through the emotions, the numbers curves, the weather forecast and a host of other things to try to provide the best information. In the middle of all of it, he's subtly trying to get his clients to make the best financial moves, not ones that are necessarily going to give them a thrill.
Into The Age of The Internet
He finds himself a bit of a dinosaur in the age of the Internet, when the commodities brokerage business has itself become commoditized, he said. But he thinks that the informed broker still has an important role in the world of instant, mouse-click trades.
"There was already a 90% casualty rate among new traders before online trading," he said. "I think the mortality rate is as high as ever. Having a lot of information doesn't mean that you have any judgment about what to do with it."
And not to get the wrong idea, Hackett seems pretty humble about his work. Taking in the "multifaceted diamond" of supply-side issues, market demand, emotional price swings, unpredictable business moves and unconscious motivators, he knows that he, too, is human, and that he can only go with his best feeling at any particular time.
"Every day you miss the best trade of your life, but there are some that are really embarrassing," he said. "You're always forced to act on imperfect information."