Futures Trading – Open Outcry and Technical Analysis

Successful futures trading can be accomplished in different ways. In today’s markets, traders will typically use technical analysis, fundamental analysis or a combination of approaches to succeed in futures trading.

What about the “good old days” where trading was conducted via open out-cry in the hectic trading pits? How did traders succeed with no fancy computers in front of them, no technical analysis tools and no access to real-time breaking news?

Discussions with several traders reveal some interesting approaches to making money while trading in the pit. One extremely successful pit trader (I’ll refer to him as Trader X) would gaze into the Treasury Bond futures pit from a different location, set slighter above the pit. He had a very good view of the executing brokers and the market making locals.

Trader X was generally quiet in nature – he did not scream and yell constantly; instead, every now and then, he would simply lean forward and gesture to a broker to sell 100 30-Year Bond futures at the market. Almost immediately after selling, the market would start to deteriorate slightly. Soon after going short, the market would be eight tics lower. The trader would then lean forward and gesture to buy 100 30-Year Bond futures at the market. Typically, his trades would earn him 8 ticks on 100 contracts, which equals $25,000 per trade.

I personally asked Trader X what his secret was. Why do you do nothing for hours and then suddenly go short 100 contracts? What are you looking at? Did you see a special pivot point, moving average level, trend-line approaching? Why does the market usually go in your favor almost immediately after executing your trade?

His answer was simple, yet complex. Trader X believed that the T-Bond market tended to move in 8 tick increments and would “correct” or at least pause at those increments. That’s the easy part of his explanation. I asked why he didn’t sell or buy at every single 8 tick increment (he would only trade at certain 8 tick levels).

The more complicated part of Trader X’s secret was that he combined his observation of 8 tick movements with his assessment of the overall position of the local traders in the pit at each of these 8 tick increments. I asked how he knew what the overall position of the local traders is?

This particular trader would observe volume traded at a particular level and the reaction of the local traders at those levels. For example, the low price of the session for T-Bond futures is 110-08 and the market trades up to 110-16. Bonds begin trading considerably at the offer price. It is common practice for local traders to trade the “turn”, which is when the market turns from “bid at 16, offered at 16″ to “bid at 16, offered at 17″. Local traders will try to buy the “16′s” in hopes that the market turns “16 bid”, thereby gaining the “edge” in the pit.

Trader X went on to explain that sometimes, the locals simply get it wrong. Trader X had a natural ability to spot situations where the local traders got twisted up on the wrong side of the market.

It would usually play out like this: the market is offered heavily on “paper” (non-local offers) at 110-16. Brokers in the pit would begin to buy the offer, sufficiently enough to entice locals to enter long at 110-16, in hopes of trading the turn and becoming long at 110-16 while the market turns soundly bid at 110-16. Sometimes it simply did not work out that way for the local traders. Trader X had a natural ability to spot these situations and he would capitalize on them. In this example, Trader X was able to see locals buying and accumulating long positions up to on 8 tick increment. When the market traded at 110-16 it would briefly turn “16 bid” and then pop back “16 offered”. Well, now we have a bunch of locals long the market while it is once again offered heavily at 110-16. That’s when Trader X would strike and go short.

This is one example of how a simple “technical” idea for Trader X – the T-Bond market tends to move in 8-tick increments – was combined with another factor in order to determine a way to trade profitably. I have to wonder how Trader X applies an “8-tick increment” principle while trading in front of a screen. Perhaps Trader X needs some new tricks in his bag.