CONSULTING ANALYST, INTERTRADER
DID you ever see the trading pit scene from the film “Trading Places”? Well in real life it is every bit as crazy and then some. In 2007, I visited the oil pit in New York. I got some rather unusual trading advice from a 20-year veteran of the pits. The floor traders seem to have a unique take on the market, probably because they are so close to the forces of demand and supply unleashed in the pit.
Here is what the trader told me:
1. FIRST CUT IS THE CHEAPEST
“The first cut is usually the cheapest. I see so many of the new traders who are unable to take a loss. They hold on to their position for too long. They don’t understand that I too am wrong more times that I am right, but I cut the trade the moment I am in doubt. That first cut has kept me alive in the pit for 20 years.”
2. THE MARKET IS EFFICIENT
He also told me about the nature of the market: “The market is efficient. It wants to go where the orders are. These orders can be stop (loss) orders or limit (buy or sell) orders.” I asked him to elaborate and he said: “often the market will go to a certain price just to make sure as many people are filled as possible, and then it reverses. We say in the pit that they push them up to take them down.”
3. TREND DAYS ARE THE BEST
I asked him about intra-day trends. He told me he had the advantage of being able to see the orders from the brokers. His best days were “trend days”, where the market continues in one direction all day. This point was aired by others I met in the pit. If a good trend was developing intra-day, these guys would press it for all it was worth, irrespective of who was on the other side of the trade. They were never concerned about whether the market technicals were overbought or oversold. The only thing they had in mind was to press it as high or as low as they could before the bell rang.
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