Futures Trading with Skip Kelley

Welcome in, it is Mr. Stillman's Opus. John Stillman here, along with a special guest today. I'm joined by Skip Kelly, who is a fellow financial advisor. He's in, what, Manchester, New Hampshire, Skip? Yes, we're up in the Great White North here, and jeez, it's really cool to be called a special guest star.

There you go. Well, Skip is a true Bostonian, as you could probably tell just by those couple of sentences there. He does very much the same kind of thing I do, overall planning.

He's a fiduciary, as I am. But, Skip, I'm mostly interested in talking about your past life because I think it's something that a lot of people don't really understand. So, when you were trading futures, basically, first of all, explain what that is, and what did your typical day look like when you were doing that? Oh, well, I traded futures for 11 years, and the typical day, you know, once you become a bona fide, intelligent trader that makes money consistently, prior to that, there's no such thing as a typical day because you might work 24 hours a day trying to figure out what's going to be your niche, what's going to be your strategy. But, once you have your strategy put together, and you work that strategy, then my typical day, which I enjoyed the most, was pretty much flipping on the computer at around 7.30 or 8 in the morning, and I would be done trading by around 11.30 or noon.

But, everybody finds their own niche in the periods of time where they can do best doing that. It's a really great way to make a living if there is volatility. If there's volatility, you can make a tremendous living trade in futures. If there's no volatility, you're going to get chopped to smithereens. And the market doesn't tell you when it's going to have volatility and when it's going to be dead.

So, that's the challenge. And the other thing is that understanding that there's tremendous volatility, not only in markets and commodities, you know, there's tremendous volatility right now, as everyone's witnessing, but we've gone years at a time with very little to no volatility, just like we did from approximately 2010 to 2014. There was nothing. The markets were dead. They were flat.

They didn't do anything on a daily basis. So explain the mechanics of how this works. I mean, what are you looking for? What exactly are you doing?

How does the process go? Futures trading is not a whole heck of a lot different than trading in stocks or mutual funds in a market. You're trying to buy low and sell high or converse and sell high and buy low. So, either way, but you are working at both sides of the market, just like Wall Street's doing against almost every investor on the planet. People have got their money in 401Ks.

Well, guess who you're working against? You're working against Wall Street because Wall Street isn't doing what the vast majority of people who have money in the market's doing. Most people in the market, they're doing one thing. They're investing. They're putting their money in and they're hoping it goes up. Wall Street does something entirely different and that's they trade. They work both sides of the markets. They'll buy or sell. And that's what you need to know that you're working against when you're an investor. There are people out there who put a lot more work into it and make a heck of a lot more money than the average Joe.

So let's use a tangible example. What would be some of the typical commodities that you would have traded in on a regular basis? Well, the three markets that I looked at and a lot of people, some people will work in whatever's the hot market at that particular time. I liked working with one index and two commodities. I liked working with the S&P, gold and oil. Honestly, it's much easier to do that business than it is to try to be a stock picker or a mutual fund picker.

I mean, it's hard. You've got thousands and thousands of choices, but when you're dealing with just a couple of commodities or one or two indexes, you can really get to know how those things move, what might be happening next. But keep one thing in mind, nothing in the markets ever makes sense. If you're trying to apply your brains and your knowledge and your experience to what's going to happen next in the market, forget about it.

You can't. Everything is counterintuitive. So let's use the example of oil. Oil is priced pretty low right now. So if you're a commodities trader sitting there at your desk at the house with your feet up on the desk, as you've described to me before, how you operated, what are you looking for?

What are you hoping is going to happen? What are you doing with oil currently priced low to try to make money for yourself? Well, what you're really looking for is movement. First of all, most traders are looking for news because when news comes out, things happen, things pop.

And you need to take advantage of that movement. But you can't try to interpret that news because so many times good news equals a loss or a downward movement. You can't try to equate news to which direction the market's going to go. I mean, how many times do we get good news and the market goes down?

How many times do you get bad news and the market goes up? You can't apply that. What you have to do is understand the movement, where it's going, and then jump in and jump out. Take some. You don't try to take it all.

You try to take some. That's the key. And the biggest thing that one has to learn if they do that for a living is you need to completely remove emotion from what you're doing. You need to have a strategy.

And there are as many different people as there are on the planet. There are that many different strategies. Everyone has to have their own strategies. Sometimes strategies work.

Sometimes they don't. You need to have a plan for that. But you cannot deal with the two basic emotions in the market.

That's fear and greed. If you do, you will lose all your money very, very quickly. Well, so you used to trade futures, and now you're more of a classic financial advisor, operating the same as I am, helping people with retirement planning, income planning, managing risk, all those kinds of things. How did you go from the futures world to doing this? I mean, what caused you to make that change?

Well, I needed something consistent. And just to give you the path of someone who does what I do, you know, you mentioned me sitting there back when I was doing most of this work. I was between New Hampshire and Florida. And when I was doing that work, especially down in Florida, this beautiful home on a golf course, and I'd have my feet up on the desk and I'd have my Skype on with four or five buddies all around the country. So we'd be having a great time. It was a very collegial atmosphere, giving each other tips or keeping each other abreast of any movement that there were in different markets and things of that nature. It was fun. It was so much fun.

I enjoyed the heck out of it. And you know, when you finally do figure out what you're doing, you can make a lot of money. And it's just a terrific way to make a living. But I need to go back one step and let you know that if you think that you can just pop into this business and plug yourself in because you're smart and it will all equate to success, that's wrong. It's a three to five year tuition that you're going to pay learning this market. If you need to make income during those three to five years of learning, then you're in the wrong business because it's not going to happen. Don't believe anything you say as far as people being able to tutor you in a short period of time because you will go through that tuition paying process where you're going to give your money to the market in order to learn it. It takes a long time.

It's very tedious. But when the time comes, if you have enough money to get beyond that, you can start making a very, very good living. The key here is, as I mentioned earlier, is that if the markets don't have volatility, you're not going to be able to make a living. And what happened to me was that from 2010 to 2014, there was a three year period there where the volatility went just plain dead flat. And instead of making the terrific living that I'd become accustomed to in that business, and I did make a great living, now all of a sudden I was getting chopped to pieces because the movement wasn't large enough on a daily basis in order for me to take my cut.

And what happens is that you just get chopped to smithereens. Maybe you don't lose a lot. If you have good strategies, you will never lose a lot. But you will consistently not make the living that you need to make. And so for me personally, I had to make a decision.

I'm 60 years old now. I'm on the home stretch. I really want to pound it as far as income goes for the next 10 or 15, however long. I mean, I love this business, John. I think you understand is a spectacular business to be in right now, the one that we're in now as advisors, because every single person that we meet, we're helping.

I mean, how do you beat that? Well, so what would be your message to folks who maybe want to have some involvement in the futures world? I mean, is this something where maybe 5% of the population is something they can sort of do on the side as part of their overall retirement plan or something most people should stay away from? What would be your guidance on that?

Well, I'd say if you weren't going to devote yourself fully to learning it and doing it, forget about it. Do not dabble, because they'll take every dime you have and more, and you'll lose it so fast you can't even possibly imagine, because that's the whole thing with futures. Your leverage is through the roof.

So little, very quick ticks in the market, and money evaporates quickly, and that's why it's extraordinarily hard for most futures traders or potential futures traders to get over it. You can't do it with a little money. You need a lot of money, and when I say a lot, I mean a lot. You can't start with a little, and you need to make sure that you have the ability to not have to make money for a long period of time, because if that's the case, if you need to make money today, you will make mistakes, and your emotion will lead to the moves that are going to lead to your downfall, plain and simple. So this is not a dabbler's market. You really have to be in it to win it.

And even then, as you said, we're talking three to five years in that world before you really understand what you're doing. When I was told that originally, I said, pah. I'm smarter than that.

Oh, and you know what? That's the kind of person that the market loves to eat up. There are so many retired dentists and engineers and doctors who think that they can do it, and that's exactly who the market loves to swallow up whole, because those people, they think that they're smart, but they're trying to equate logic to the markets. There is no logic.

There is only movement. And you have to understand that. If you try to apply brains to what you're doing, or the direction that the market happens to go in, you will lose, and you will lose fast. Is that why you were pretty good at it, you're saying? You're not that smart?

Is that what I just heard? Oh, man, I can tell you, over those first few years, I was a dummy. Do you remember the old Fred Sanford show, Sanford and Son?

Don't call me dummy, pop. When you look back, and some things I look at what I did in the learning curve that I had, and you look back in horror, in retrospect. I remember days where I was giddy. I made a fortune. I'd be out on the golf course telling my buddies what kind of a day I had. I mean, it was spectacular. And then there were days when I couldn't even hardly lift my head.

I'd be out on the same golf course with the same guys, and I'd be moping around, sick to my stomach on the stupid mistakes that I had made that day. You have to get beyond that point. You have to get beyond the emotional point and work your plan and have the discipline to work it. That sounds a lot easier than it actually is. A very interesting world, one that I think a lot of people aren't familiar with, so I wanted to provide a little insight to it. Skip, thanks very much. Hey, Jon, nice chatting with you. This is Mr. Stillman's Opus. Talk to you next week.