Pit Trading and Technical Analysis - Can they work together?

I knew a pit trader that would trade infrequently, but when he did trade, he traded large volume and was usually right instantly after entering the trade. I will refer to this trader as “Trader Y”.

Trader Y stood quietly, for hours on end, in the 30-Yr T-Bond pit, cramped in with 500 locals. Then, seemingly out of nowhere, sometimes even in quiet periods, Trader Y would jump up and scream frantically, something like “I WANT TO BUY 500″. Other traders would look at him like he was crazy.

He did not seem to be crazy when, almost immediately after his purchase of 500 T-Bonds, the market would start to rise considerably. He developed quite a reputation this way - stand quietly, apparently ignoring the action in the pit, as he gazed up at the ticker wallboard. Then suddenly and quite frantically, he would put on a massive position that would usually be an instant winner.

I felt compelled to find out his formula for success. He was an approachable sort of individual - I asked him, “okay, what’s your secret?”.

Interestingly, there was some Technical Analysis involved in his response. He would look at two things: first, he would study the markets that were most strongly inversely correlated with the T-Bond market. Doing this is somewhat art and somewhat science, as markets correlate with other markets and then shift correlations over time.

Secondly, Trader Y would identify critical levels on price charts of the correlated market. For example, if the T-Bonds were trading inversely with the CRB Index, Trader Y would spot critical levels in the CRB Index - levels that if broken, would spark a reaction on the T-Bond market. This trader used weekly pivot points in the CRB. He would simply gaze at the wallboard and watch the CRB Index, looking for something pivotal to happen in that market. When it did happen, he would jump up and put on a large T-Bond trade. That was his secret - combine technical analysis with correlating two markets. In summary, after he confidently identified the inversely correlated market, he would wait for a technical evident in that market, and then put on his position in the T-Bond market.

This approach is different than that of a post I wrote about Trader X - this approach can be used in today’s markets, which are traded almost exclusively electronically (with a few exceptions).

Both Trader X and Trader Y used a technical analysis idea and capitalized on it by combining it with one other component in order to devise a successful trading plan.