October 26, 2020

The Anti-Social Club

If you put social media in a can, one of the themes that stand out is the envy, doubt, and cynicism posted by the many “new generation” types that accept the industries line that market timing, technical analysis does not work or at best  TA is an excuse when a major change happens for no apparent reason touted by the media.

Today when one reads market commentary it is a slave to whatever the media is hawking. “President Donald Trump said Friday that he does not want the aid deal to bail out Democratic states. The major averages fell to their session lows on those remarks… Several market experts and economists including Federal Reserve Board Chairman Jerome Powell think it is imperative that lawmakers reach a deal on another stimulus package.”  According to CNBC’s Fred Imbert October 23, 2020. So the market is hanging out for fiscal stimulus.

If we know what the majority is focused on as a contrary investor/trader where should our focus be? It should on our price-based process, with the main feature being risk and opportunity management. It is this concept that becomes blurred by people believing investing is guided by the outside news (anything other than price) or has something to do with the trailing P&L or the if the last trade was a winner or loser. When the market does not care about your money.

The main takeaway you need to know is the market is 180 degrees opposite social or anything that comes out of social media, the market is not social at all. When it comes to outside news, it can be used as an indicator of where the market is in the long term scheme of things. For example, when supposed good news is ignored, and purported bad news is exaggerated, you are in a bear cycle.

The above headlines point out two main tenants of Contrary Thinker. One is the headlines don’t matter directly, it is how the market reacts. The other is the envy and cynicism that many want to be pros have of the true market wizards. As if their mistakes somehow improve their stature of not knowing anything about achieving above-average returns. All they know is following the crowd and the media so they make the sale.

What Contrary Thinker wants is the same thing you want

I have set out to prove that Contrary Thinker’s methods – based on legendary concepts and rules, not lip service –  can help you “protect your clients” and achieve above-average returns. That is why you were handpicked and invited into the LinkedIn private group I created for that purpose as well as to get the same information to my fee-paying clients: “Volatility Reports.”

I should have gained your attention via memos, group blog posts, and direct messages where I related to you,  our methods, research, strategies and positions. My group and I bracket the media noise and the industry propaganda to focus on a process for optimal low-risk high-reward “one-way trades.” In other words, why take a risk trade for an average profit, instead of waiting for a few big trades each year achieving 30%+ annual return with less than a 5% MDD.

But do not take my word for it, the above idea is taught by Brett N Steenbarger PhD., director of trader development at Tudor Investment Corp. He confirms what I learned by reading the work of real market wizards and listening to all the videos produced by the legends, including Paul Tudor Jones II, and applying their rules seriously.

What they all have in common is 80% to 90% of their profits come from 10% to 20% of their trades. This is also a fact, according to Brett. A study revealed that “across different traders and trading firms, 90% of all profits were attributable to 10% of all trades.”

Here is a key take away that “a large percentage of trades have to be ‘scratched.'” Brett puts it this way, “A cardinal skill in trading recognizes that trade is wrong before it hurts the P/L. Time and again, I have seen good traders exit trades when the trades fail to move in their direction; bad traders exit only after the trade has moved against them.” They called risk management.

On the other hand, opportunity management is crucial with the lion’s share of profits coming from big trades. This applies to any time frame you trade. If you are a day trader, you are looking for the range days and annual one day return days. Days that move from open to close is the low and the high of the day, and that range is 2% or as large as 8% or 13%. We witnessed such days in the 2020 bear market.

To manage the opportunity is not as some think in putting on an opening trade size that will maximize returns from the excellent trade. Instead, Contrary Thinker uses and teaches a Turtle leveraging strategy.

Here is what Dr. Steenbarger found is that the worse traders zig when they should zag, being pulled and pushed by money, their trailing P&L. Whereas, “The best traders can identify superior trading opportunities—and are patient in waiting for those…”
The secret of trading success is the ratio of your largest position size relative to what you usually trade. Contrary Thinker takes the masters seriously in this opportunity management. Our strategies will leverage up to 10-to 1 and 20-to-1, depending on the liquidity of the market.

Successful in general and, more importantly, Alpha comes from the ability to identify—and wait for—immensely profitable opportunities and then take maximum advantage of those. While 20:1 position sizing may be too rich for your blood, the principle is valid: success is a function of putting size on for logical, not emotional, reasons.
So, risk and opportunity management boils down to scratching trades that do not move promptly as expected, while at the same time milking the opportunity, once it is clear.

The truly unsuccessful traders are moved by money, client and peer pressure, or pride.

Brett provided this antidote, “I recently asked a trader why he hung onto a long position for an unusually long period. He looked at me somewhat quizzically and replied, ‘Because I had the bottom!’ He was willing to sit through a choppy trade if it went in his direction and if nothing happened to convince him that he did not identify the bottom. That one trade made his entire day.”

Visitors at the “Volatility Reports” Group in LinkedIn need to opt-in as a subscriber before their free look runs out. 

These prices are only available to members of the LI group, otherwise, they are twice the price. 

Great and Many Thanks,

Jack F. Cahn, CMT
A Thinking Man’s Trader Since 1989,
Copyright 1989-2018
www.ContraryThinker.com

— ContraryThinker does not assume the risk of its clients trading futures and offers no warranties expressed or implied. The opinions expressed here are my own and grounded in sources I believe to be reliable but not guaranteed.

–Trading futures and options involve the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options.