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My own experience supports Richard Josslin's posts concerning the value of
visiting the exchanges and spending some time down on the floor where one can
observe what actually goes on, in and around the pits.
While most of the action is at large exchanges like the CBOT and the CME, I
benefited most by my visit to a smaller, more intimate exchange - the Kansas
City Board of Trade. Years ago, when the KCBOT had an active trade in the
Value Line stock index futures, I considered becoming a local under a program
where you could get a seat for about $5000. While my visit convinced me that
I was better suited to trade from an office rather than from the pit, I
consider the insights I gained from standing in the pit for a couple of days
an invaluable asset in understanding how markets actually work.
I was "assigned" to an experienced local who graciously explained to me what
was happening at any particular time. He identified the paper fillers, the
large locals with deep pockets who could trade size and small locals who were
nervously scalping
a few ticks on 1 to 5 lots. He explained the market moving effect of large
orders from other time frame traders and hedgers. I saw how some traders did
nothing all day but arbitrage the spread between the Value Line and the S&P.
At noon, when the paper flow dried up for a few minutes, I watched a large
local suddenly start screaming his offer of 150 lot, panicking the small
locals out of their longs. After a mini fast market to the downside, the
large local began buying back his shorts at the previous swing low, forcing
the small locals to reverse with him. As the pace slowed, he smiled while
some of them were obviously trying to deal with a gut full of adrenaline -
just a small example of the price discovery function of the locals to provide
liquidity by driving prices to near term support or resistance.
Even now, years later, when I observe a reversal back with the trend and see
a thrust bar accelerate away from the price turn on a 1 minute chart, I
occasionally think of the fear in the eyes of those small locals caught on
the wrong side of the trade. From the rawest newbie to famous hedge fund
managers, we are all subject to these same market dynamics in whatever time
frame we trade. A visit to the pits can help one relate those two
dimensional charts on our screens to the emotions that drive the markets.
Best Regards,
Jim Alvis
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