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December 30, 2020

Volatility Reports 12/30/20 Bitcoin’s Cycle

The Bell Weather of the Equity Markets

The Bitcoin backers think anyone who does not believe in it just doesn’t get it—even after eleven years of experience, seeing it run from pennies to nearly $30,000, what’s not to believe.

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December 29, 2020

Hanging Out with the Designated Driver

Hanging out with the designated driver will help you achieve alpha while everyone else is hungover from the party

If you listen, you will still hear the debate regarding the importance of trading techniques or psychology impacting the bottom line.  In effect, it is both; in a word, it’s a “focus on the process” with the main feature being risk management. It is this concept that becomes blurred by people believing it has something to do with the money when the market does not care about your money.

I have gained your attention via memos and direct messages where I related to you that, “My market research and strategy development takes the legends literally. Where my group and I bracket off 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 can achieve 30%+ annual return with less than a 2% 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 all 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.” Otherwise 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 quasi-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 the logical, not psychological, 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.”

Contrary Thinker’s Volatility Model is our answer. 


Many thanks,

Jack F Cahn, CMT

Capital Managers and Professional Investment Advisors visit: www.ContraryThinker.com

Contrary Thinker 1775 E Palm Canyon Drive, Suite 110- box 176 Palm Springs, CA 92264 USA. 800-618-3820 or 25/1 Poinsettia Court Mooloolaba, QLD Australia 4557 614-2811-9889

— Contrary Thinker 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.

— Pricing is subject to change without notice.  My indicators and strategies can be withdrawn for private use without notice, at any time.

— Contrary Thinker does not refund policy all sales are the finale.

— Trading futures and options involve the risk of loss. Please consider carefully whether futures or options are appropriate for your financial situation. Use only risk capital when trading futures or options

December 29, 2020

Thinking like the Great Ones

To be Great, you need to think as the great ones think.

Pardo points out that the “Proof of this concept is available by the mere consideration of a shortlist of some of the household names of the greatest discretionary traders. This shortlist of the greatest would include legendary billionaires such as George Soros, Paul Tudor Jones, Bruce Kovner, and T. Boone Pickens.”

One of the legends I admire and studied is Stanley Druckenmiller, and it is his notion of risk management that I set out to understand and replicate. As it turns out, he did not have a corner on the idea. The right concept of risk management goes back hundreds of years to Livermore – “… it’s the waiting, not the trading.”

Livermore uses the Dennis Rule, and it cuts across all the legends from the beginning of trading history, the Market Wizard series, into today’s Hedge Fund greats.

The best risk management is not to take a risk at all.

The modern-day hedge funds control risk by not taking a risk. Still, once everything is 100% correct based on their comprehensive system or investment checklist, they enter the position and, in the words of Druckenmiller, “go for the jugular, they leverage up throughout the trend to maximize profits. Turtle Traders use this method with their trend following systems, marking their account value to the market at the end of the day. It is what Soros calls his “one-way trade.”

This idea is easy to understand once you cut through what the retail industry and the media publish every day, pulling on your fear and greed. They overlook the above idea of waiting, ignoring, or they consider it trash. The financial press and part of my industry even see investing or trading only from an “act now,” “happening now,” breaking news environment, making it transactional and Vegas type of gambling, which is the opposite of taking no risk, aka risk management!

Everything the legends do is just the opposite of what many in the industry promote. They only pay lip service to the great ones and use their wisdom to take Social Media polls. But once you take to heart what the legends say and what it means to implement their knowledge, you have advanced your capabilities beyond the majority.

By now, you have realized you need a method that tells you when there is low risk with a high reward condition. The reward side of the idea – opportunity management – is once you are in a position, you go for the gusto; you leverage up systematically to maximize your profits. The Soros “one-way trade.” In this way, you can trade 10% of the time, with 10% of your capital. As such, your reachable objective is a return profit on your account that beats the average return of the long-term S&P. Or you can go “all in” with a more significant asset allocation to make a fortune.

To execute these two critical rules, you need a strategy to get you in and out of the market profitably, the primary trade plan if you will. These are the robust trading strategies or formulas based on the Pardo tradition. Many hundreds of them are sound with better than average profits. But what is critical is they all have periods of profit run-ups and drawdowns, which is what you want to control via a system’s model.

The model I developed is called the Technical Event Model (TEM). Technical because it is 100% price based. It tells you when to trade the strategy and when not to trade it. It will tell you if it is a good time or a wrong time or an excellent time for any traditional, well tested, and robust strategy. For the professional advisor and capital manager, I call it the New Paradigm, a new way of thinking that turns a strategy into a comprehensive investment or trading SYSTEM.

Because of the popularity and shared knowledge, the industry has, I will use the robust day trading volatility breakout strategy for one example. But the model is universally applicable.

Breakout systems are designed to capture the next immediate move after the market moves past a certain point. The trader is not concerned with any long-term forecast or analysis, only the immediate price action after the trigger is hit.

Volatility breakout systems are based on the premise that if the market moves a certain percentage from a previous price level, the odds favor some continuation of the move in the same direction. This continuation might only last one day, several days, or go just a little bit beyond the original entry price if the net profit is worth the risk.

With a breakout system, the trade is always taken in the direction that the market is moving at the time. It is usually entered via a buy or sell stop. The bit of continuation that we are playing for is based on the principle that momentum tends to precede price.
There is also another principle of price behavior that is at work to create trading opportunities. The market tends to alternate between a period of equilibrium (balance between the supply and demand forces) and a state of disequilibrium. This imbalance between supply and demand causes “range expansion” (the market seeking a new level), which causes us to enter a trade.

There are several ways to create short-term volatility breakout systems. I have found that different types of systems based on range expansion test out quite similarly. Therefore, whichever method you choose should be a matter of your personal preference.
A full range of sound breakout systems from the “Turtles” method with the 4-week high/low channel breakout to the following one-day breakout strategy.

The strategy takes the high low range of the previous day, multiplies that by 55%, and adds the result to the next day’s open for the entry buy trigger and subtract it from the open for the short entry stop price day. If filled, the opposite level is your day stop, and the exit is on the open next.

Without money management stops – both stops losses and profit stops – here are the basic code results on the mini-Nasdaq 100 futures. The table above shows the monthly performance of the strategy.

The two-year period made $289,060, where it adds a contract after a winner and reduces back deals to one lot after a loser.

But look at the historical risk, with several months of losses over 30k. Plus, look at all the months that had typical or average months. The average month is an $11,000 profit. But how can you trade over the long term for an average month when your potential risk is over $30,000? You need to base your trades on the “Dennis rule.”

To focus and trade only the above-average opportunities, part of the TEM model uses the implied volatility data from the CBOE. VX is the ticker symbol for the CBOE VIX Index Future. VX is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. The predictive nature of the VIX Index makes it a measure of implied volatility. The index is derived from an option’s price model and shows what the market suggests about the stock’s volatility in the future. It is not one that is based on historical data.
In the above chart, I have high-lighted when volatility – VX- is oversold when you apply one of your favorite overbought/oversold oscillators on it. For TEM, I use the %BB, which is my Bollinger Band Oscillator.

The oversold reading says that the market’s concern about a significant change in the market’s price is extremely low; hence it is oversold and ready to cycle back to the other extreme.

Based on a calendar month, not a week but a typical accounting month, when VX is at an extreme, you engage the above system for the month and continue to trade the next month; if VX has not hit a radical in the other direction, an extreme overbought.

Instead of being at risk for 24 months, you are only in the market for half of that time. You have doubled your average monthly return to over 20k; and lowered your historical risk to $3,900, only 10% of the risk potential trading suboptimal trades.

This is the new way of thinking and the new approach to systems trading, the new paradigm, and the results are in the following table.

With the Dennis rule’s adoption and having a tool, a model that tells you the coming period, be it a week or a month or more, an extended calendar period will be the best to engage your trading plan. Your trading strategy will be optimal. Traders can now manage their money without their profits and losses managing them. You are currently in control with a price-based model that makes your plan a comprehensive system.

Contrary Thinker is a diversified financial services firm.

Publishing: Volatility Reports an advisory blog and market’s newsletter based on this new model. MarketMap Scenario Planner Contrary provides advanced tools for trend bias and change of trend timing based on mundane market cycles, seasonal event-based cycles, tidal cycles, astronomic and astrological event-based cycles

The visual indicators and signal generating systems are available as plugins for TradeStation – the same tools used in our publications- rent or purchase. They will be available for rent again in 2021 at TradeStation’s TraderApp Store

Swing Trading Ideas – both bull and hedge (bear) are provided both in our publications, via email and iPhone apps. 

Download the TradeExchange app for free and follow my bull and bear stock and ETF trades, plus FX and Options soon. 

Great and Many Thanks,

Jack F. Cahn, CMT

Contrary Thinker since 1989,
Copyright 1989-2020

Contrary Thinker 1775 E Palm Canyon Drive, Suite 110- box 176 Palm Springs, CA
92264 USA. 760-459-4681 OR

25/1 Poinsettia Court Mooloolaba, QLD Australia 4557 614-2811-9889

— Contrary Thinker 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.

— Pricing is subject to change without notice. My indicators and strategies can be withdrawn for private use without notice at any time.

–Trading futures and options involve the risk of loss. Please consider carefully whether futures or options are appropriate for your financial situation. Use only risk capital when trading futures or options

December 29, 2020

The Dennis Rule Better Management

Not chasing your equity curve, is be better than your last trade

“The best risk management is not to take a risk at all.” Jack F Cahn, CMT

One of the first things you hear about winning at investing and trading is to let your profits run and cut your losses short. Everyone accepts this as usual.  However, they are missing the point.

Richard Dennis sees it this way: “You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a brief period. What you can’t afford to do is throw away your capital on suboptimal trades.”

Too many traders pay lip service to what the great ones say, they know it is the truth but fail to understand and act in the same way. To do what Dennis suggests, you need a method, a model that tells you when you have a great trade on the horizon and when all the rest is simply an “average trade” at best.

Poker Analogy Improves Understanding

In the game of poker, the rules force each player to make a bet. These bets are called blind antes. They are made by each player when he is to the dealer’s left in draw or flop-style poker games.

Here is the key and the exact rule Richard Dennis made about trading. There are blind bets in poker because a player can sit there for as long as he likes and not play. He can wait to catch a premium hand before making a bet, a good bet. Here is one of the clearest examples of the impact of money on the player, forced by the “rules of the game.”

If the player antes $100.00, and he is dealt a “5” and “7” unsuited low cards and someone raises the bet before the flop – the draw cards – the odds of him winning or losing are the same. The money has no impact on the odds.

However, human nature will push him to defend his $$100 blind bet. But doing so in this example hand of a “5” and “7” unsuited, which have about zero odds of winning, defending your ante is foolish. The player needs to walk away. But what if the player had been dealt a pair of Aces? A much better hand to win with where the player does not need help from the draw cards.

Human nature could make it worse if our poker player betted large in the past on a “5” and “7” hand where he got lucky and won big? How what is his posture? He may be prone to make a “bad bet” and in a big way. Yet the outcome has nothing to do with his past winning experience making a poor bet.

Placing “defensive bets that have little chance of “catching” a sound card or cards to win is going to lose and break the bank over the long run.

A significant point to understand is that the poker player needs to know what the premium hands are, which ones “stand-alone” can win without any help from the draw or flop cards. Likewise, the trader needs to know the setups that precede the significant winning trade positions.

The trading game has the built-in advantage of not forcing the investor to take a risk; he/she can stand aside until he is 100% certain. You wait for the setup, the precondition you know precedes a winning move for you. That is the hard and fast rule from Richard Dennis – a cofounder of Turtle Trading.

The Everyman Trader is not Helped by Old School Thinking.

Conventional thinking and the typical approach to investment/trading is forecasting price targets and direction followed by calculating risk and reward based on trend and targets.

However, the way the masters use the Dennis Rule, which is direction neutral, looks at the market’s context. The Market Wizards look at the setup- first to judge risk and reward, based on the market’s background.

There are many ways to successfully apply the Dennis Rule that fits your personal risk/reward personality or your fund’s investment policy. But I will only focus on one here because I use it. Personally, it is dramatic in its results and built for the aggressive trader or a hedge fund trader.

There are many reasons why no one else talks about the Dennis Rule. For one, it is not transactionally motivated, so it does not get the attention of the Sell-Side of the industry, nor is it a liquidity provider; it is not based on you the idea that you must be in it to win it. Getting your head around that meaning puts your miles ahead of the majority.

Understanding the method does not matter if you trade mechanical strategies or trade a plan based on advisory or visually trade indicators. The only difference is who or what is seeing the data stream.

Contrary Thinker’s methods and system development are based on the above concept of risk management and opportunity accessment, learn more about TradeStation plugins.

Here is the Dennis Rule put another way, “Stop trading for the average, only trade when it’s a great opportunity.”

To drive home the significance of this idea, you need to contrast it to an industry standard. One of the pioneers of systems trading -Robert Pardo – in his original text said the following:

“Let us consider the plus side of the discretionary trader. It is quite simple. The biggest plus is that, to date, I do not believe that a systematic strategy has yet been created that equals, let alone exceeds, the performance of the greatest discretionary traders.”

If you understand this and accept this as real that a robust trading system or a static assembly-line mechanical plan will not make anyone wealthy, again, you are way ahead of the trading mob.

In other words, you are taking a risk each trade to be average, to make an average win. A good trading plan or a system – the way it is defined and developed by Bob is statistically robust; therefore, they are generic. They are designed to deal with all the significant conditions in the markets, going back over the longest period possible. They are meant to provide the trader with an average winning trade each time he regularly holds a position over the long term.

This goal of Algo-strategy trading is the heart and soul of the system trading school of thought. The industry is happy with this because it is “transactional,” and many system traders do well, not great, but can make money. If your goal is to make an average amount of money each day or week to supplemental income, it is very doable. But you need to understand you are taking a risk not to make riches but only to be average at best, as that is the best you can expect from a robust trading strategy.

Part Two “To be Great, you need to think as the great ones think.”

December 21, 2020

Volatility Reports 12/21/20

Why take a 50% drawdown risk for the average annual return of 10%? Because major declines can’t be timed,  so they say.
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December 18, 2020

On The Wings Of Tail Risk

Making Money from the Turbulence of Secular Change is 180 degrees opposed to Investing for a Long Term Average of 10%. So why take the risk of a 35% to 85% drawdown?
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December 16, 2020

Volatility Reports 12/16/2020 FANG & Nikkei Dow

Horizontal triangles present holiday opportunities.

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December 14, 2020

Volatility Reports 12/14/2020

Secular Change what it means and when.

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December 14, 2020

Volatility Reports 12/14/20 Recap

The traditional move late in the cycle is to buy offshore bonds in a stronger currency than the USD. This tact has worked over the last twenty years but that regime is changing.

USD makes a long-term bottom; one more decline to the low 90s is in gear and touch with the COTs due this week. The bar chart pattern is a horizontal triangle, which supports a thrust lower and a terminal move, not the beginning of a new trend.

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December 9, 2020

The Last Fourty Years Were an Outlier

Contrary Thinker deals in Time, your preparedness, not fear.

“Let me admit something. There is no Bond King or a Stock King, or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, and me too, have cut our teeth during perhaps a most advantageous period, the most attractive epoch, that an investor could experience. Since the early 1970s when the dollar was released from gold and credit began it’s an incredible liquifying total return journey to the present day an investor that took marginal risk leveraged it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdraws could and in some cases was rewarded with the crown of greatness. Perhaps, however, it was the era they made the man as opposed to the man that made the era.”

Bill Gross, Man in the Mirror April 12, 2013
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