If you’ve ever watched a movie or TV show about Wall Street, you’ve probably seen the traders, ties hanging loosely around their necks, frantically staring at their terminals while trying to make millions or billions for themselves or their firms. Sweat-soaked with bulging eyes, these pop culture depictions paint a grim portrait. Is that what life really looks like for independent investors who go beyond basic strategies like buying and holding stocks, and ride the waves of the market as futures traders?
Not really. The world of these more complicated traders is enigmatic, and we’re here to help shed some light on what traders deal with and what they do every day.
In order to understand what a futures trader actually does every day, it’s important to first grasp what futures are. For instance, how do futures differ from basic investments like stocks? Stocks, when purchased, represent fractional ownership of a company.
A future, on the other hand, is a derivative — a financial instrument with a value reliant upon underlying assets (a resource with economic value, including but not limited to stocks, bonds, and even physical items like factories) and their movements, rather than a simple stock. A futures contract is an agreement to buy or sell a specified amount of an underlying asset at a future date at a specified price. For example, a futures contract might promise to deliver a certain amount of coffee at a specific date and price. Unlike most other types of derivatives, there’s an added element of obligation involved in futures trading. Futures obligate the buyer to purchase an asset, and obligate the seller to sell. Less advanced future traders stick to cash-settled futures, meaning that they can settle the difference in their trades with money, so that they don’t accidentally have to deliver the underlying asset. Because if the above mentioned futures contract for coffee underperformed, and wasn’t a cash-settled future contract, the party would need to theoretically pay up in coffee!
Diversification and Leverage
A trader can use derivatives like futures to profit from the large-scale movement of masses of stocks or commodities such as sugar, corn or natural gas. Experienced traders can use combinations of options (another type of derivative where you aren’t forced to sell or buy) and futures to create strategies that profit from market sentiment or even more complex ideas like market volatility (variation in market prices that can move both up and down without a significant overall increase or decrease).
A Trader’s Average Day
What is the average day like for a futures trader? To help explain, we reached out to Mike Seery, futures trader and founder of Seery Futures, a commodity futures and options consulting, advisory, and educational firm.
“I’m not a day trader,” Seery explains. “As a day trader you’re in and out all day long, it can be a long day. I’m more of a position trader, where you buy something, you sell something, and you place your stop and just hold it.” Seery defines a “stop” as the most investment he’s willing to lose before he pulls out of a futures trade. With that stop in place, there’s much more financial control. “if you’re wrong you can be out of it quickly and if you’re right you can be in it for two months or so.” With a stop order, the moment a position reaches the stop price, it turns into a market order (the most basic type of buy and sell trade scenario). This makes the position much more likely to be purchased, so as long as there’s a lot of trading around that position, you’ll get out close to your stop price and won’t be left hanging.
How does Seery approach the average day? “In the beginning, years ago, I took the days more seriously, kind of like a football player or baseball player,” he says. “In the beginning, they’re more emotional. And then after their tenth or so year they take it in stride, and I take it in stride. If I have a bad day I move on, if I have a good day I move on, too. I don’t take it so emotionally. If you do, it will kill you. It’s exhausting.”
“I write for a lot of publications,” he continues. “So a lot of times I just sit and write the article and that breaks up the time. Staring at a screen all day is not the way to go. Look at other charts, potential trades down the road, that’s what I’m always looking for, the next thing.”
But what is life like for the kind of trader who does keep track of the market all day long? To get that perspective, we reached out to Fari Hamzei, an equity options and index futures trader and founder of Hamzei Analytics.
“I usually get up at 7am. and take the dog for a walk,” he explains. I’ve got a Chihuahua and Italian Greyhound mix. I take him for a walk, come back, take a shower, get some coffee, and get to my desk by 7:30.”
After spending a few hours at his home office, he arrives at his office as his company prepares to run one of their two daily webinars for subscribers to Hamzei Analytics, “Then I go to my cocoon, I have eighteen monitors here. I set up my alerts [to monitor market movements], I have targets based on the volatility measures. We have a Skype so [my subscribers] can hear me live,” Hamzei explains that he likes to Skype while trading so that he can be fully transparent in all his business dealings.
And after a full day in the cocoon? “By the end of the day I’m a zombie, I wanna go flat. So I go for a swim, have a cigar, go out with friends, and have a bite to eat. Then I come home and study a bit more. It’s very important that you exercise and watch what you’re eating.”
In the end, Hamzei explains that “trading is about knowing yourself, accepting yourself, and seeking the truth.”
Mike and Fari both portray the futures trader life as the life of an adaptive problem solver constantly staying abreast of shifts in the market. If you want to transition from traditional stocks to the world of derivatives like futures, you may wonder where to start.
In all walks of life, practice turns a novice into an expert, but how do you learn and test out strategies without putting your future at risk? Find a platform, such as TradeStation, which maintains historical data around futures that allow you to set up potential trades and test them against what has happened in the past. If you think the markets might perform differently than historical data indicates, you can even import your own datasets to explore how a trade might perform.
If you are just starting out, you have some learning to do before you can spend your afternoon on the treadmill listening to CNBC and contemplating Butterfly Spread Trades. But you can learn the basics, think about your portfolio and opinions on market direction, and then check out a trading platform such as TradeStation to test out your developing skills.
No offer or solicitation to buy or sell securities, securities derivatives or futures products of any kind, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner endorsed by TradeStation Technologies, Inc. (or any of its affiliates). Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success.
Kyle Ackerman is a writer, analyst, and technologist based in Los Angeles.
Giaco Furino is a Senior Writer for Studio@Gizmodo.