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Trading Comparisons

Professional vs. Amateur Traders

Why is there a common misconception that the majority of people who trade commodity futures lose money? Studies show that a majority of amateurs who trade futures on their own do lose. However, there is a logical reason for the amateur's losses. If a non-professional attempted to practice medicine or law, he or she would probably perform quite poorly, similar to many non-professional futures traders. From monitoring amateurs who trade futures on their own, we have observed most trade on rumors, tips from friends, gut feelings, part-time research, or just for the fun of it. We believe most amateurs who trade futures on their own are making a serious error in judgment.

They are not professionals and, in our opinion, are doomed to fail even before they begin - just like a non-professional would be if he or she attempted a complex medical procedure. In most professions, there is a vast difference in performance between amateurs and professionals. This especially applies to futures trading. We ask: Doesn't it stand to reason that successful futures trading requires full-time professional preparation, participation, focus, and natural aptitude? It should come as no surprise that, in the highly complex and challenging field of commodity futures trading that the vast majority of non-professionals or amateur traders fail.

Studies, in fact, show that as many as 90% of these "do it yourself" amateur traders are ultimately unsuccessful trading futures on their own. However, many professional Commodity Trading Advisers (CTAs) have been shown to achieve substantial, highly attractive returns through prudent money management with comparable or even less volatility than mutual funds and blue chip stocks!

Consider now a study published in a question-and-answer brochure on managed futures produced by the Chicago Mercantile Exchange (CME). The performance of 363 professionals were tracked over three-and-a-half years (from 1990 through mid-1993): At the end of this period, 94% were profitable. According to the most recent brochure published by the CME: Of a total of 119 commodity funds and pools in the Managed Account Report Fund/Pool Qualified Universe Index that traded from January 1990 through October 1996, 81% were profitable over the full period. Additionally, 82.5% of the commodity pools tracked by Managed Account Reports were positive in 1997 and 51.4% had double-digit returns.* In 1998, according to The Stark Report, Third Quarter 1998, over the past four years ending September 1998, there were 61 professional CTAs who had compounded rates of return ranging from 100% to 750%. In 1998, 65 CTAs had returns ranging from 24% to 319%. (Please be advised that these studies didn't represent the entire universe of CTAs and funds/pools. Other groups of CTAs and pool/funds may have had better or worse results.)

While professional management can in no way insure success, studies have shown professional Commodity Trading Advisors do experience an appreciably higher success rate than individual amateur traders. In fact, academic studies have shown CTAs are no more risky than the S&P 500 itself.

The Professional Vs The Amateur Trader

 
Commodity Trading Adviser*
Amateur Trader
Definitive Strategy Follows a long-term plan based on extensively tested research; limits losses on losing positions while letting profits run on profitable positions. This patient, disciplined approach can pay big dividends though, as with any investment, risk exists. Usually in the markets seeking instant gratification. Lacking a definitive game plan, he often changes his approach midstream, resulting in impatience and creating chaos. Quick to take a profit and let losses run.
Equity Management Often diversifies into trading positions covering as many as 25 markets while typically committing only 10%-40% of an account's equity to the markets. Trying to "break the bank," often commits 100% of an account's equity to the markets. Commonly trades only one commodity resulting in a lack of diversification and increased risk.
Trading Decisions Commits full-time attention to following a definitive system which may look at market prices and trends, therefore acting immediately upon signals and market knowledge. Usually can pay only part-time attention to the markets. Misses news and often makes decisions based on rumors, hunches, gossip, or the opinions of others.
Discipline Realizes the markets "owe him nothing" and "take no hostages." He expects his share of both winning and losing trades. Neither result will influence him to deviate away from prudent money management and his trading plan. Cuts losses short while allowing profits to run. Realizes capital preservation is a prerequisite to capital appreciation! Believes his destiny is to predict the direction of the markets rather than to manage risk. When losing, feels he is due for a win. This win-it-back-at-all-costs mindset inevitably leads to downfall. Hangs onto losing positions hoping they will come back. Conversely, takes profits prematurely to validate his prediction.

*Studies have shown that professional CTAs do experience returns greater than the individual investor. Nevertheless, the risk of loss exists in futures trading and past results are not necessarily indicative of future results.

 

The Value of Professional Management

Professional management brings to futures benefits similar to those experienced with mutual funds and investment advisers. These benefits include:

  • Full-time dedication to markets.
  • A disciplined trading approach.
  • Money management techniques that seek to control losses and protect profits.
  • Strategies that attempt to balance risk and reward.

 

Characteristics of Managed Futures

Returns are usually independent of stock and bond market trends.

  • Opportunity to participate in virtually all sectors of the world economy.
  • Flexible enough to profit as easily in rising markets as declining markets. (The potential for loss is, of course, also equal.)
  • Potential to perform well in both inflationary and deflationary periods (unlike stocks).
  • Provide direct access to markets unavailable in traditional investment portfolios.
  • Viability of managed futures is enhanced, given the trend towards globalization of world economies.

 

COMMODITY TRADING INVOLVES SUBSTANTIAL RISKS DUE IN PART TO THE HIGHLY SPECULATIVE NATURE OF SUCH TRADING. AS A RESULT, AN INVESTMENT IN A COMMODITY TRADING ACCOUNT IS ONLY SUITABLE FOR YOU IF YOU HAVE ADEQUATE MEANS TO PROVIDE FOR YOUR CURRENT NEEDS AND PERSONAL CONTINGENCIES AND YOU CAN BEAR THE ECONOMIC RISK OF LOSING YOUR ENTIRE INVESTMENT.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.