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What techniques do floor traders use?
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What techniques do floor traders use?

  #11 (permalink)
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traderwerks View Post
@fattails

Those strats ( risk reversals etc ) are not something that a retail trader can do and make money doing.

@traderwerks: I have not posted that because I think that anybody can make money applying such a setup.

I am not trading options, and as a retail trader I would not try to compete in market making strategies, where low commissions. financial surface and capital costs are key.

I am really just curious to know, how the floor trader - now a dying species - made money before computers mostly took over. Maybe we will get some entertainining stories here.

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  #12 (permalink)
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Tomorrow TST will be here and John Hoagland is on the floor and Michael Patak used to be, they can answer some questions. Also planning on having Danny Riley from MrTopStep on soon -- who also is trading from the floor, and he can answer questions as well.

We have several floor guys amongst us already as well, thx @wldman.

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  #13 (permalink)
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Fat Tails View Post
@traderwerks: I have not posted that because I think that anybody can make money applying such a setup.

I am not trading options, and as a retail trader I would not try to compete in market making strategies, where low commissions. financial surface and capital costs are key.

I am really just curious to know, how the floor trader - now a dying species - made money before computers mostly took over. Maybe we will get some entertainining stories here.

I believe most floor traders in the past scalped order flow.. They can see it develop with the energy and noises around them.. I believe that was their primary edge, in the execution of their entries and exits.. Their execution was often so timely that they didn't even have to look at a chart.. Often they just decide to hold a bit longer or take a small profit.. Their edge was one of execution..

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  #14 (permalink)
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Jedi...

is right that order flow was the primary, or at least a primary edge for may on the floor. For me it was not a scalp as much as it was an arbitrage.

The "usual" scalp for me was based on the option greek "gamma", but that was mostly done to recover decay to the value of the option over time...the "greek" theta. So when the stock was moving you could make your theta and also scalp some profit due to a high gamma position.

Most of the time, for me anyway, I was looking for an arb opportunity that would be certainly delta neutral and hopefully keep all the greeks relatively neutral. There are no free passes, but sometimes you could make a good profit backspread, either ratioed, calls/calls or long calls and short stock using gamma to scalp delta neutral.

With respect to the arb types posted by Fat Tails...you didn't come in looking to execute a specific technique, rather based on an order that came in, you looked for the opportunity for the best arbitrage. For me that metric was reversal, conversion, box, roll.

So if a floor broker came in and said, "how are the AIG front month 55 puts" some guys would look at the screen and say back the market displayed there. Another way to do it was to price based on the arb. If I am buyng puts, how is the stock priced and where are the calls. So if the order is selling puts my first price is the conversion. I'm buying puts and stock and selling calls....OR maybe I'm already long the calls better...so I can execute the arb at a better price than the displayed market and lock a neutral profit.

Opposite if the broker is buying puts...that is the reversal. If both those are priced out you look to the box or the roll where your variables are different month, different strike , or both. So both the scalp and the arb where available.

One change that started to happen is the dumbification of the trader. Guys either relied or where taught to use the price on their hand held device. That price was deteremined by an algo or a guy upstairs that was considering firm wide position and intermarket flows. So the "prototypical" trader started to change...the attributes where different.

Does that make any sense?

The psychology and the physical clues where even more interesting than the diversity of the complex market.

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  #15 (permalink)
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Fat Tails View Post
Floor traders mainly relied on order flow from the buyside, as incoming orders would allow them to take the opposite side of the trade and later match this with another buyside order. The noise level on the floor would tell them how many orders were coming in.

As far as they used any price levels, these were known prior to the start of the floor session, such as the highs and lows of prior day, prior week, prior month and floor pivots.

But ask somebody who really knows, such as @tigertrader.

You folks always show invaluable knowledge. Thank you for this.

As I hear it from interviews many of them traded with the move.
For example, in the interview with Paul Rotter (I am sure most of you know him) or in this documentary Floored: Into The Pit - Epic Trader Movie! - YouTube
they say floor traders traded with the flow, simply following what public does, because they would be the first to trade new information thereby having a huge edge over general puplic and upstairs. It apparently does not work any more (as Paul Rotter told that in his I believe 2004 interview), but when it did, it was easy money.

Someone like Tom Baldwin (first Market Wizards) did what Fat Tails wrote, taking the opposite side of the trade.

I would also love to hear more from those who have experience trading on floor.


Last edited by ReaM; August 31st, 2012 at 06:24 PM.
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  #16 (permalink)
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There is an upcoming webinar next Saturday where Danny Riley will be discussing the transition of floor-to-screen, plus many other topics.

https://futures.io/elite-circle/22550-webinar-danny-riley-mrtopstep.html

Mike

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  #17 (permalink)
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Itchymoku View Post
I've always wondered what techniques floor traders use to trade in the pits of exchanges without using charts. I've tried to research this but couldn't find any useful information. Most documentaries and such don't really go into the specifics. Could anyone enlighten me on how people trade in the pit or point me in the right direction to material on the web or links to other threads that would explain this process a little bit more clearly? Thank you, I appreciate Big mike and this communities feed back.


here is what Douglas had to say about the floor traders :


This type of rationale creates a herd mentality (extremely prevalent on the floor of the exchanges), where most everyone is looking for direction, assuming everyone else must know something they don't, otherwise why would they be doing anything.
… the locals on the floor of the exchanges have the least amount of patience, are the most impulsive, are the most easily disappointed, and consequently have the smallest price objectives and shortest time frame perspectives. As a result, they are the most active and will all be trying to do the same thing at the same time.


My next major disappointment came when I began to meet and make
friends with as many floor traders as possible, believing that if the guys up
in the offices don't know how to make money, the floor traders certainly
must. Again, I found the same conditions that existed up in the offices.
Other than a handful of floor traders who had a reputation and a mystique
that everyone seemed to be in awe of, I couldn't find one person who was
making money consistently, who wasn't confused or knew what he wanted
to do and then did it, without first having to ask everyone around him for
confirmation that he was doing the right thing. I am not implying that I
didn't meet traders who at some point in the day hadn't made money. They
just couldn't keep it. I knew many traders who could make $2,000 or
$3,000 the first couple of hours of trading. But they would always lose it
back, plus more, a short time afterward.

I have a personal story to illustrate a typical superstitious belief that floor traders have. One morning I went into the men's bathroom at the Chicago Mercantile Exchange, and as I approached the only urinal not in use, a floor trader using the urinal next to the one I was about to use turned his head, looked at me, and said in a very cautious tone, "Don't use that one, you can wait for mine, I'll be done in a second." I gave him a puzzled look, and he then pointed to a penny that was at the bottom of the urinal. I gave him another puzzled look because I didn't have the slightest idea about what he was trying to communicate to me. As I proceeded to use the urinal with the penny in it, he turned with a nervous expression on his face and strode away from me as quickly as he could. Later on that day, I told one of my floor trader clients about this experience and asked if he knew what was going on. He said certainly, that it was very common knowledge that money at the bottom of a urinal is a bad omen and certainly something to be avoided. After I thought about it for a moment, I wondered what would happen if I went through the entire exchange and put pennies in all the urinals.

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  #18 (permalink)
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ReaM View Post
You folks always show invaluable knowledge. Thank you for this.

As I hear it from interviews many of them traded with the move.
For example, in the interview with Paul Rotter (I am sure most of you know him) or in this documentary Floored: Into The Pit - Epic Trader Movie! - YouTube
they say floor traders traded with the flow, simply following what public does, because they would be the first to trade new information thereby having a huge edge over general puplic and upstairs. It apparently does not work any more (as Paul Rotter told that in his I believe 2004 interview), but when it did, it was easy money.

Someone like Tom Baldwin (first Market Wizards) did what Fat Tails wrote, taking the opposite side of the trade.

I would also love to hear more from those who have experience trading on floor.

Have you visited and read my entire "Floored" thread?

https://futures.io/commodities-futures-trading/12893-floored-but-back-my-feet.html

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  #19 (permalink)
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tigertrader View Post

An awesome read, was glad to read it again just now

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
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If you want
to support our community, become an Elite Member.

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  #20 (permalink)
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