What’s common between sports & commodity trade?

There is an old story about two hikers who encounter a tiger. One says: There is no point in running because the tiger is faster than both of us. The other says that it is not about whether the tiger is faster than both of us. It is about whether I’m faster than you. And with that he runs away. You guessed it right the person who ran was a commodity trader.

Traditionally while recruiting a commodity trader, one looked at the sportsmanlike traits. Surprisingly, in recent years, an increasing number of companies in the West are scrutinizing professional poker players to find talent and analytical tools, someone who has made a successful living as a poker player for a few years would more likely be a good trader than someone who hasn’t! 

The broader discipline of economics and finance has developed expertise that does take behavioral factors into account. There has been a perception shift in commodity trade from “value-based trading” to “price movement-based trading”, as a result of which, traders are no more thinking of rationality. One of the devastating myths perpetuated in commodity trade is a simplistic assumption about the behavior of people — a trader acts rationally to maximize the return. 

Investment bubble has demonstrated that traders are far from uniformly rational and the behavior of markets in general shows that behavioral factors of individual commodity traders are important for the profits and losses. 

You may often heard comments like “if the market goes down for three years in a row, it has to go up the next year!” or perhaps say it yourself ? That is ‘gamblers’ fallacy’ — a phenomenon which is very common amongst most commodity traders. 

It is normal for any commodity trader to frame the market race and hope to win by buying and selling commodities at the right time.

That doesn’t seem so hard... So what does this mean in practical terms? There are some of the companies in India who have employed technical analysts in order to take a contrarian position of the recommendations. No doubt with same data sets, same analytical tools, low depth and liquidity in the domestic market, the success rate of these companies have been much better than the others. The way people react and think in commodity market has more to do with the pressures’ rather than rational thinking. 

In India, the typical commodity trader no more fits the stereotypes which usually presented as ill-prepared, unsophisticated, unaware of the risks and undercapitalised.

It is seen that companies come and go but the traders dealing in a particular commodity line remains the same. Some of them are experienced, well-educated, financially sophisticated and well capitalised. Most of them seem to be in the area of odds against making profit; they continue to trade for the recreational reasons.

Published in The Economic Times