Futures Trading Pit - Participants & Trading Methods

    What are Futures Trading Pits?

    You may remember seeing images of traders screaming at the top of their lungs and making all kinds of hand signals in order to place buy and sell orders on the floor of the Chicago Mercantile Exchange (CME). There is a method to all of this madness and it is actually quite efficient.

    These groups of traders will aggregate in what is referred to as the futures trading pit. It is in the futures trading pit where all the action occurs. There are different pits for all of the different futures contracts that are traded, such as gold, soybeans, cattle, etc. Inside the pits, traders communicate using a verbal system, known as the "open outcry", and also through a plethora of hand signals to communicate price and quantity.

    Futures pit traders will be trading for their own accounts or for those of their clients. They must be extremely fast in buying and selling futures contracts as the amount of leverage being used can cause large losses in a very short period of time.

    The bid and ask prices established by traders in the futures trading pit are accurate representations of the true market value for that security or commodity. Pit traders will bid prices higher until the market reaches equilibrium; this is commonly referred to as "price discovery".

    Like any market place, the futures trading pit is not exempt from price manipulation. Pit traders are privy to quite a bit of information and will drive prices up and down to run stops and then reverse the market in the other direction. Pit traders will work together and act almost as guinea pigs, taking turns in bidding prices up on light volume in order to find stop loss orders.

     

    Tim Ord
    Ord Oracle

    Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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