The Floor Trader Method -
A STORY FROM THE TRADING BATTLEFIELD
I am a futures trader living in Chicago. I've worked in the
industry for many years, as an exchange employee, order desk clerk, Series 3
broker, and finally as an independent floor trader at the CBOT (MidAm division).
I learned much from the veteran traders at the MidAm, but the profit potential
of floor trading was limited due to the scarcity of "outside orders"
at that exchange. So I took the skills I had picked up from the floor and
applied them to off-floor trading. I knew that I had to develop my own system
for day trading, as the popular methods around then either didn't work, produced
meager profits, or had a low win percentage.
I knew that the old "trend following" and
"breakout" methods were unsuitable. Some traders, in interviews or
articles, would say things like, "our system only produces a 40% win
percentage, but the winning trades more than make up for the losers". To
me, that type of trading was absurd.
I, and most normal people, would not want to endure 60% loss
percentage. (A coin toss is 50%!).
(Some of the "systems" or "trading courses"
still being sold today are based on these outdated principles.)
I became a Series 3 broker at a local FCM. My plan was to advise
clients on futures trading while trading my own account. The owners of the firm
were unusually tight-fisted about expenses. To cut costs, the brokers had to
share quote terminals in groups of 2-3. This particular firm cut costs in other
ways, including quality of floor service, which was to cause major problems
But in the meantime, I studied charts and systems, made
observations, and traded. I searched for a way to apply the floor trader's
"scalping" technique to off-floor trading. The first year was tough,
financially, but I made a breakthrough in the second year which led to the first
profitable month of day trading I had ever posted. Then, the second month was
profitable. And so on. I went from trading the NYFE to the S&P (at that
time, the S&P was still $500 per index point). The win-loss ratio of this
method was around 9 to 1. One week I made eleven winning trades in a row.
The customer business also picked up, for myself and everyone in
the office. The Grain markets of 1996 were taking off and a lot of commissions
and new accounts were coming in. We traded the customers all week, and partied
every weekend. Some of us flew to Las Vegas, the Caribbean, or Mexico for
three-day trips, but tried to be back by at least Tuesday - there was a lot of
money to be made.
So I was day trading the S&P and winning, and my account
grew, despite the cash withdrawals.
I also collected larger and larger commission checks. I
increased my trading size, and even used my methods to day trade Coffee futures,
which was a feared market at the time.
That summer I made a return trip to New York City, to visit
friends and to live it up in Manhattan, of course. I could afford it now. I
returned to Chicago a little hyped, thinking of relocating to Manhattan and
trading full-time for a living. I decided to trade my account even more
aggressively, increase my profits, and drop the brokerage part of the business,
as the customers were becoming time-consuming. Then I would be free to live
I hit the markets hard Monday morning. I got nailed for a quick
$450 loss near the open, but I bailed out, and made $600 later that day. I was
even more confident, having turned a losing day into a winner. The next two day
were all winners. I was ahead $2100 by Wednesday's close.
Thursday was a different story.
I didn't realize it at the time, but the events of that Thursday
were foreshadowed by some disasters that had befallen several customers and IB's
of the firm.
That spring, the Corn, Wheat, and Soybean markets were the
busiest anyone had ever seen (since the ‘88 markets, at least) but the floor
operation used by our firm was doing a terrible job of handling the flood of
orders we sent in. At the CBOT, and the CME as well. As the owners of our firm
were obsessed with saving money any way possible, they usually hired the lowest
they could find, which was often the worst they could find. Orders that should
have been filled were coming back "unable"; orders we thought were
unable were being reported as "filled" the following day. Stops
were being "blown through" by hundreds of dollars. Customers went
"debit"; some threatened lawsuits; one IB trading through us went out
of business. I figured I could avoid the madness by staying with the S&P's,
which hadn't had major problems up to then.
Well, the problem service reached the S&P, as well. On that
Thursday, I placed a limit order to sell. I canceled the order a short time
later. I stopped watching the indexes for awhile - the grain customers were
keeping me busy. Market action indicated that the S&P order should be
"nothing done" - provided it was canceled, on time, by our floor
operation. It wasn't.
The sell order was "too late to cancel". That was bad
enough. However, due to incompetence and ignorance in both the floor and office
operations, the sell was not reported to me for nearly two hours.
To make a long story short, Thursday was a disaster. I was short
the S&P without knowing it, and the market was rallying to new highs.
The next mistake was mine. Veteran traders know what I mean; one
day you lose perspective, and trade emotionally rather than logically. I was
enraged over the operations error, and instead of getting out immediately and
salvaging the rest of my account, I attempted to "trade out of it".
I "averaged up" - sold more contracts. The funny thing
is, my system called for being long the market - but all logic and reason went
out the window that day.The market continued higher. At the close, my account was
"blown out". Eight months of winning trades destroyed by one afternoon
I have long since left that firm, and the retail customer
business. I am now focused on trading the markets and perfecting my methods.
Things have changed in the futures markets. The size of the
S&P contract has been cut in half, and the CME finally introduced a mini
S&P, long overdue. Electronic trading and Internet order entry has made
precision day trading more feasible - much better than in the old days of
phoning in orders.
Real-time quotes are now available over the Internet, along with
chart graphics. I'm back on the day trading battlefield. I have refined the
method I used back then, and it works even better than before.