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January 1, 2021

Trend Following is More Than Long-Term

On the shoulders of Richard Davoud Donchian

Most investors and traders reference Richard Dennis as the father of the Turtle school. While he certainly made it a household name, he was standing on the shoulders of Richard Davoud Donchian, who coined trend following a decade earlier. Today I have had the luxury of building on their working and advancing their rules to a modern-day knowledge base.

Please note from the get-go that the majority of market players attach the meaning of “trend following” to the long-term time frame for the multi-month time horizon investor. In reality, “trend following” is applied to any time frame. Put another way, trends exist for any size bar and for any time frame you want to trade. With that in mind, applying these guidelines is of a robust nature.

  1. It is not the percent win rate or the frequency of success that matters. The investor/trader needs to know the edge for every trade before he makes it. The point is the magnitude of success that is critical. The size of the potential opportunity is where the Contrary Thinker’s volatility model is used to predict the immediacy of the move and the size. That model is the Technical Event Matrix (TEM).

The old school suggests the calculation of the volatility of the instrument you are trading with the Average True Range. This technique is widely used and highly discounted.  Very few people have the code to TEM, and only members have access to the plugins and their signals.

  1. You need to understand the concept of shorting. It would be best if you were not biased one way or the other on the market but be willing to play both sides as conditions dictate. I find the majority are phobic about the short side, something that one needs to get over if they want to achieve more than average returns.
  2. Stop worrying about how you enter a trade and focus on the exits; and keep it based on price, not money. Plan before entry where the market tells you the position is wrong and get out of the position. See the strategy page on our member’s blog for strategy exit ideas.
  3. If you want to make Turtle-type returns that are better than average (Alpha), you need to get comfortable with leverage and pyramiding winners. This is where TEM comes into play because it tells the investor when to expect a period of a forceful trend for the time frame he is trading. See the member’s only blog for the Turtle leveraging strategy for both scalpings to long term positions.
  4. The old school teaches you to vary your initial position size based on the volatility of the instrument. In contrast, sound risk management is low or no risk. So no matter how high the probability the precondition you only add after the position starts to work in the investors/trader’s favor.
  5. From a money risk point of view, risk no more than 2% of your account on a given trade is the standard rule of thumb. However, what is critical here is opportunity management before getting into the trade. Assuming it is 5 to 1 or better, you can be clipped four times in a row and hit in the fifth and still make money.

A new page that covers the entry and exit strategies page, based on charts and indicators, will be linked to this page shortly, showing how we control risk and maxes out opportunity.

  1. Be 100% price based, stay away from the evils of money, the being pulled around by your P&L if you can use a software program to test your strategies and systems. This will give you a better feel for the performance of your methodology.
  2. There is no fixed portfolio of markets or set account balance that you need to trade. Things change, risk change, and opportunities vary. Plus, each trader is different and should develop their plan according to their temperament and capitalization.
  3. Instead of watching TV to shape your trading decisions, use the price. Price is the purest form of information that the markets give.
  4. Remember that all content that is streaming in the public sphere is just that publicly available. There are several problems with it. It is a boom area for sales and marketing and a place for entry-level types to provide entry-level type advisory. Just like the financial news media, understand what it is, and stand above it. For the network news, their down-side is to get the insider interview they are used by the insider to make a market, and 90% plus of social media is inexperienced—a space I curate for a contrary indicator.

Contrary Thinking Starts Here 

I put my name on my work and stand behind it

 

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

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. 

 

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.”

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.

 

March 29, 2019

The Art of War

The best sources of ideas that should be incorporated into everyman’s investment and the trading plan comes and goes like adolescence fades. They ebb and flow along with the long very social-cultural mentality behind the markets.

The Art of War by  Sun Tzu

THE OLDEST MILITARY TREATISE IN THE WORLD and one referenced by Vladimir Putin regarding his annexation of Chiema. When he accomplished his goals without a gun being fired.

The study of military strategy finds identical usage in poker and trading. The lowest risk / highest reward approach in strategies and tactics used in poker and trading is not any different than the general’s approach to war. The best of the best manage their capital as if it was a battle, one that promotes the idea of only funding positions that have a high probability of winning, and once into that position to leverage up maximize profits.

 

Here is a concept used on the battlefield and made successful by King Frederick II of Prussia. It is called the “oblique order attack.”

The oblique order is a military tactic whereby an attacking army focuses its forces to attack a single enemy flank. However, the general concentrates the majority of his strength on one flank and uses the remainder of his troops to fix the enemy line.

The strength flank would then create an angled or oblique formation, and attack the strongest flank of the enemy with a concentration of force.

Once the critical flank was secure, the commander would wheel the troops 90 degrees to roll up the enemy line -this is what I call getting all your strategy’s ducks – setups – in a row – and the angled formation would continue to advance to crush the opponent.

The echelons not involved in the assault served the important function of holding the rival army in check by remaining defensive and threatening, thus offering protection to the attacking echelons by keeping the enemy force occupied.

It’s how and when investors and traders engage their systems based on risk and reward forecast. The majority don’t get this for many reasons, one is the transactional indoctrination they get from all sources.

So while building systems on robust methods are the preferred approach, the strategies all still have great periods and drawdowns; and these periods can be predicted. It sure reduces activity hence gets little to no attention by the industry.

In my mind, this is one of the best methods of controlling risk and maximizing profits. So in this battle for investment survival, “never interrupt the enemy when he is making a mistake.” Let them continue and sit and wait patiently for you low-risk high reward opportunity.

In poker, you let them rise into your superior hand.  If you are in 100% or max percent cash allowed by policy since the double peaks of 2018 you have lost very little based on the 200 day average prices are only 2.7% above it and you are well positioned to re-enter at prices 30% lower and you are able to use long Volatility systems to add to your returns over the next two years.

more on systems and tactics in the next few blog post.

my best,

Jack

 

October 15, 2018

MarketMap™ 2018 Annual One Day falls (AODf)

The 8.85-year Cycle

Just like any relationship, anniversaries are important to the market, and many traders know it may cost them if they do not recognize these occasions. As a nation, there are days we will not forget, like 9/11. Just like a rock thrown into a still pond, the effects repeat over time.

The same big splash effects happen in the market, and it does not forget. Since 1885, some ten major DJIA AOD falls (≥ -3.60%) occurred between September 10 and October 31.  These are sizable price events.

There are many more than ten referred to above when you consider declines in the one-day class that are less than the 3.6% but happen with a negative geopolitical news or media event.

MarketMap draws many parallels to the 1972- 1974 period based on the events from 1973 (9-year cycle x 5) this week is the anniversary of the “Arab oil embargo” among others in the 9-year repetition.

While MarketMap came into the year headlining “Geopolitical Security threats will precipitate financial distress” it is noteworthy that the real-life headlines read “Saudis threaten retaliation after Trump warns of ‘severe punishment’” for the suspected killing of a self-exiled Journo, Jamal Khashoggi, one of Saudi Arabia’s most prominent journalists.

However, what has become the new normal in the last 18 months is nothing ever happens, the problems simple pill one on top of the other.

However, cathartic market action in the current timeframe may lead to a clearer vision of what the future has in store.

One of the “among others” referred to above is the weekly long bar low in the 3rd week of October, highlighted in this chart. That big splash in the 2nd and 3rd week of October 2000 was a 12.% decline to the intra-week low. The week of October 20, 2000, declined 6.2% before putting in a mini panic low to recover.

The dates that come up for an AOD fall are today, the16th or the 17th. They set up as panic days from open to close. The longest bar of a move tends to be the last bar of that trend. The long weekly bar that ended the move in 2000 was 6.2% the one that precedes it was 5.8%, for example.

Thus far, since the October 3 peak, the biggest decline is only 3.2%. Exceeding that daily range will suggest a low is nearby, and MarketMap will look for cross-checks to confirm a low. Also of note here, the AOD decline in February was 6.9% and in a period of great extremes, in this era of the “tremendous” where anything is the “probably the greatest ever done,”  and after 2017 a year of the lowest volatility on record, expecting an AOD decline exceeding the 6.9% this week would not be a surprise.

The scenario has not changed: risk/reward favors selling with selective long V hedges. A low here in the latter half of October followed by a failed rally into the election with another decline into the COT dates mid-November. There is the potential of an alternate or second AOD decline hitting on or about November 23.

 

October 14, 2018

The New Paradigm in Risk Management is Direction Neutral

Almost everyone’s approach to trading/investing is forecasting price direction and calculating support and resistance for risk and reward.

This method looks at context first to judge risk and reward, based on market dynamics.

Here is what I mean by “direction neutral” and it does not matter if you trade mechanical strategies or trade a plan off visual indicators. The only difference is who (or what) is seeing the data stream.

To drive home the significance of this idea you need to contrast it to the industry benchmark. 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.”

I accept this as true that a robust trading system or plan will not make anyone rich, and that may be one of the reasons why you trade visually with discretion and not with systematic signals.

In other words, a trading plan or a system – at least the way Bob developed them – are statistically robust and in practice generic. They are designed to deal with all the major conditions in the markets going back over the longest period as possible. They are meant to provide the trader with an average winning trade each time he takes a position on a regular basis over the long term.

This goal of a trading plan or method is the heart and soul of the system trading school of thought that the industry is happy with and many traders do well at. Furthermore, it is likely your goal to make an average amount of money each day or week as supplemental income.

But as Bob says himself in so many words about system trading, it can be good, but not “GREAT.”   He goes on to point out the following:

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

You can’t argue with that, right?

One of the legends I study 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, it goes back 100 years and in my lifetime cuts across all of the legends I am familiar with, that “the best risk management is not to take a risk at all.”

Traders like Jesse Livermore spoke about his first principle that big money is made by the sitting and the waiting, not the trading. Waiting until all the factors are in favor of his trading strategy before making the trade.

The modern-day hedge funds control risk by not taking a risk, but once everything is 100% correct based on their comprehensive system or trade plan checklist, they enter the markets and, in their words, “go for the jugular.” In other words, they leverage up and maximize profits.

It is easy to understand, once you cut through what the retail industry and the media publish every day, overlooking the above idea, ignoring or considering it trash. Our even seeing it regarding transactions or Vegas type of gambling, which is the opposite of taking no risk!

Everything the legends do is just the opposite of what the industry promotes, their idea of a trade plan. They only pay lip service to the great ones, when you think it through.  But once you take to heart what they say and what it means to implement you know it can’t be transactional or “you have to be in it to win it.”

The key rule of risk management is to avoid risk, do not take on a position until everything in your model is in your favor. A key rule of opportunity management is once you are in a position, you go for the gusto; you leverage up to maximize your profits.

To execute these two key rules, you need a strategy to get you in and out of the market profitably, the basic trade plan if you will. We have all seen strategies that work. There are many, hundreds of them that are sound.

Key number two is a governing model to tell you when to trade the strategy and when not to trade it.

Like I said above, “no one else talks about this method because no one else has my tools.” But I will rephrase because I assume others in the bastions of Wall Street and behind the boardroom walls on La Salle, that traders running hedge funds have a similar model.

Here is a Long Volatility Example

Regardless of how it is measured volatility reflects the difference between the market as we imagine it to be and the market that exists. It is that tension our model -TEM- seeks to measure its extremes and its outcomes.

If above average performance is achieved moving between short and long volatility exposure, we will only attain that edge if we relentlessly search for nothing but the truth. Otherwise, the truth will find us through volatility.
Here is an example of waiting for the 100% set up. The overarching matrix of engagement is our Technical Event Model (TEM).

One reason why a few will ignore this idea is they doubt they will ever find a method that gives them 100% certainly before they get into the market.  This doubt is imbued into all interested parties no matter what side of the desk they are sitting. It is in every sales and marketing piece that hits the airways. The 100% certainly makes the point but in the real world mark it down to 99% or whatever level gives you supreme confidence.

These numbers to the left will make sense relative to the above approach using TEM. The annual results are from a short only breakout scalping system that implements the Turtle money management method. It is easy to see that the strategy had two good years 2008 and 2018, both high volatility years and both preceded by signals provided by TEM that the year

would be a high volatility one.

However, if you assume you have to “be in it to win it” trading the system blindly, it’s a long time between drinks and a little bit of a bumpy road. In the 14-year history, there is a $53,000 drawdown. So, if one uses negative thinking and assumes poor timing, then the drawdown is a certainly. Given the drawdown, a capital manager would need $1,000,000 in funds to have the risk limited to 5% +/-.

Again, taking every trade, you would expect to pick up at least one year in ten of $200,000 or a 20% return on the account. Now, what if you have a Macro Filter like TEM that tells you when to engage this long volatility strategy?

Going into 2018, TMT’s January 18 MarketMap™  suggested the use of this exact system.  Here is how the year to date would have performed after $32.00 a trade cost to achieve the $243,528.00.  The strategy has the filter embedded in the code and you can see it keeps the systems from trading from June through August. 

The first thing a risk manager will see is the loss in May, on a million-dollar account, is a palpable 1.6%.

However, the successful fund manager needs more than one opportunity a decade, isolating one or two a year would be adequate.

ContraryThinker’s job is to provide opportunities for its professional’s advisors and managers. For all the liquid markets on either side of the trade.

ContraryThinker is always looking for the truth, nothing but the truth.
Contrary Thinking Starts Here

 

Great and Many Thanks,

Jack F. Cahn, CMT
A Thinking Man’s Trader Since 1989,
Copyright 1989-2018
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 to your financial situation. Only risk capital should be used when trading futures or options.

NO WARRANTY / NO REFUND. Contrary Thinker MAKES NO WARRANTIES, EXPRESS OR IMPLIED, On ITS PRODUCTS AND At this moment EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL CBI BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THE PERFORMANCE OR USE OF ANY PORTION OF ITS PRODUCTS.

September 15, 2018

The Bubble Indicator

 

1. Prices are high relative to traditional measures

2. Prices are discounting future rapid price appreciation from these high levels

3. There is the broad bullish sentiment

4. Purchases are being financed with high leverage

5. Buyers have made exceptionally extended forward purchases, such as of inventories, to speculate or to protect against price appreciation

6. New buyers have entered the market

7. Simulative monetary policy threatens to inflate the bubble even more.

We have pointed out number six above based on our modeling.

Our measures of volatility show that from October 2017 into the January peak the buying was based on fear of missing out FOMO. The Technical Event Model was in a sustained period of panic buying. Something that is normally an event not an ongoing condition. These late cycle buyers will flip out at the first sign of pressure on their account balance.

In fact, the February decline stopped right at their break-even level of these FOMO players; and from a long-term point of view our targets for the bear takes prices back the surprises Trump win in late 2016.

The chart here has they period of panic highlighted.

Available to CMTs, Capital Managers, and Professional Investment Advisors

Quarterly subscription $449.00 OR Annual Subscription with collaboration $1,599.00

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.

NO WARRANTY / NO REFUND.ContraryThinker MAKES NO WARRANTIES, EXPRESS OR IMPLIED, On ITS PRODUCTS AND At this moment EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL CBI BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF THE PERFORMANCE OR USE OF ANY PORTION OF ITS PRODUCTS.

November 28, 2017

Breaking Through the Institutionalized

Drum roll, please! I will reveal to you the best keeps secret of trading success. No matter how often it is published and waved in the face of capital managers, it will never be endorsed or widely accepted or promoted.

Because this secret runs against everything that is engrained in the industry and by the industry. In fact, the brokerage side of the community creates the basis and prime mover for everything via sales/marketing. This impacts everything from the forecast, trading methods, or ideas they encourage.

So by giving away this secret, it will never ever be threatened. Oh, sure the big guys use it – the buy side, the capital managers, many who loath brokers. The legends and market wizards will tell you how they did it, but again they don’t care as I don’t care. Because it will never get traction among the majority, that majority includes both some in the public and some professional managers. They are all people who just so happen to be dumb money.

So, while so many traders are chasing free tips in that massive flea market called Tweeter, my crew the TMTrader’s are learning how to trade like the legends, and they are making money.

What is fascinating to me is how promoters in the industry find the 80-20 rule, they point to it as a real “thing,” but they don’t have a clue how it works.

Yea sure they can define it, here it is,

“The 80-20 rule states that 80% of outcomes (trading profits) can be attributed to 20% of all causes (strategy signals). Therefore, if the overall account profit comes from 20% of the trade entries by focusing on the critical 20% allows for more efficient quality control, in other words, leverage up to max profits.

But, what the public hears from the industry is the following advice:

“…that because the overwhelming majority of trading profits comes from just a small percentage of trades, it’s critical that traders not be discouraged by losers and that they take steps to limit losses and let winners run.”

Do you see the problem with this?

It’s merely the old platitude, “Cut your losses short and let your profits run.” What broker’s dribble! Plus, why not avoid the risk?

What you hear is to eliminate your trading losses you must cut them short or blame them on emotional or impulsive trading. Therefore, you have to use tight money stops or master your emotions.

With experience comes wisdom but only after fighting through the brainwashing the industry engrains us with. That the solution they have for it all is, “you got to be in it to win it.” No matter how they cut it up it is all about two things for the industry:

  1. Generating transactions
  2. Protecting the firm from unsecured debits.

The idea of batting for an average is one of these mentalities custom made for the broker. The goal they have created for you is the so-called investment grade policy. In other words, a plan that is regarded as carrying a minimal risk to investors (i.e., the firm). It is a product based on trading for an average, and doing that every day—if not more often. Traders understand the compounding effect of the multiplier factor. If you can day trade on average $100 a day every business day, you’ve padded your income by $2,200 a month.

What works out nicely for the brokers is this strategy fits right into statistical models of validation, which they point to as their vindication.

The greed evolves into high-frequency trader (HFT) with the idea that if you have a system producing a positive mathematic expectation of net $15.00 a trade, and if you can do that 100 times a day, you will make $30,000 a month! I will let you be the judge in that regard. I think there is a better way.

I can tell you with 100% certainty that no one is talking to you about the solution. No one is showing you how to avoid any portion of the 80% that are at best average winners. At least not until NOW!

So, I will skip ahead right here and give you a partial solution, but the gist of it is below. The partial solution is multiple systems of different styles traded as a portfolio.

We have one method that trades breakouts one that trades failed breakouts another that executes reversion to the mean plus trend follower. In the universe of systems there a few more types than the above but you get the idea.

What I do and how I train is first change in attitude, the point of view, not any change in the investment-grade policy or the financial goals. Rather I teach how we get there, with less risk and how to maximize returns. Plus, it is custom fit to the style and needs of the investor/trader.

Some readers will understand the above as a dream smasher while for a handful of strategy developers and traders it will be a millionaire maker.

Ok so here it is, the trading strategy is the easy part, the hard part is knowing when to trade it and when to set it aside. This is where a Thinking Man’s Trader diverges from the broker dominated industry.

Since if we have seven different kinds of market conditions, we have seven different types of trading strategies; and we have engagement based on “STRATEGY TIMING.”

Here is an example called the Hedge Fund approach one all-embracing system is used to engage one style of trading, let’s call it fast aggressive breakout type.

The strategy is Macro filtered to the extent that it only trades for three to four months of the year with a very high success rate. The account is structured to use a 10% percentage of the capital to achieve a financial risk/reward goal of 3% risk for a 25% reward in the 12 month period. You understand the 80/20 better now? Take away the small 10% of capital structure to fit it to your money goals.

Our group developed priced based model for this; it provides signals when to trade the particular strategy. There are many variations here, each fitting to the objectives and understanding of the trader.

Yes, goals can range from the modest to the grandiose making five plus times your risk capital.

So, you invested your time reading this brief and here is your take away and take it seriously. The secret to successful trading is precisely how the famous names do it; I mean Richard Dennis and his Turtle Traders.

To control risk, don’t trade, do not trade unless everything is in your favor to take a position. That is everything in their favor according to the trade plan/strategy. Once into the winning position or winning streak, go for the kill, leverage up systematically.

Great and Many Thanks

Jack F Cahn. CMT

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