I know a lot about grains. In fact, I know much more than the average person about energies, metals, currencies, softs, and financials. I would never try to trade any of them for customers for a simple reason. I know others who have done nothing for most of their careers except focus on each area. Futures trading is a zero-sum game, meaning there is an equal loser for every winner. In many cases, the loser is the person on the other side of these traders.
The investing world has seemingly infinite possibilities of vehicles to invest in, meaning there are experts for each. My job is to identify these experts. So how is a professional trader different than an amateur?
- This is their job. If you have been successful enough to have a fair amount of investable assets, you may have other responsibilities and commitments that preclude you from tracking trades. The futures market trades virtually 24 hours a day, and a common question I have for my small managers is how they monitor trades overnight. In one case, the trader sleeps next to his computer and responds to alarms as they go off at night before returning to sleep.
- They typically started learning about their chosen market, working for somebody else where they got experience, made mistakes with someone else’s money, and then went off on their own once they became an expert.
- They have a plan. Most amateur traders invest on limited knowledge, take on more risk than they should, and stick with a trade longer than they should. A professional will document each trade, keep track of their statistics for winners and losers, cut their losses, and move on while managing the capital available for the long run. This is especially important when leverage is involved.
- They have a specific skill set that requires them to be very smart. Trading at a high level is a meritocracy. Many Ivy League-educated managers have lost in the market or never raised assets to begin with. The average program lasts three years, as the results speak for themselves. Investors move to managers that make profits, and the results are posted for everyone to see on sites like www.IASG.com.
- The National Futures Association (NFA) regulates the futures industry. As part of this, managers are required to show the average performance of all their accounts in a specific strategy, disclose previous programs, and submit to NFA BASIC (www.nfa.futures.org/basicnet/) tracking, which shows their history, including any sanctions. This way, you have a verifiable account of what they have done for actual customers. In addition, so-called “Signal Selling” services that make trade recommendations can simply walk away and start a new program if they make a mistake. But, again, they are not required to disclose previous results.
- You can fire them. If an investment isn’t working or you decide you don’t like the style of trading, you can change your account. This is much easier than changing yourself.
While it is certainly possible to have success trading on your own, a diversified portfolio is hard to create with one person. This is especially true if you are managing work and family at the same time. In my opinion, it is easier and more reliable to outsource.