Contrarian trading involves going against crowded market sentiment and looking for opportunities when speculators are excessively short or long.
Market confirmation is crucial before taking a trade, waiting for a 'new failure event' where the market rejects bearish or bullish news to ensure alignment with contrarian viewpoint.
The COT report is a key tool for contrarian trading, with Jason utilizing extreme levels of positioning among commercials and speculators to take trades based on the disparity between their positions.
Deep dives
Contrarian Trading Approach
Jason Shapiro discusses his contrarian trading approach, where he goes against crowded market sentiment and looks for opportunities when speculators are excessively short or long. He believes that when everyone is in agreement, it is a signal for contrarian trading.
Importance of Market Confirmation
Jason emphasizes the importance of market confirmation before taking a trade. He waits for a 'new failure event' where the market rejects bearish news (when going long) or bullish news (when going short) to ensure that the market action aligns with his contrarian viewpoint.
Using Commitment of Traders (COT) Report
Jason extensively utilizes the COT report to gauge market participation. He looks for extreme levels of positioning among commercials and speculators, and takes trades based on the disparity between their positions. He considers the COT report as a key tool for his contrarian trading.
Risk Management and Exiting Trades
Jason applies risk management techniques to his trades, calculating risk and reward. He exits trades when the participation level shifts back towards neutrality, indicating that the crowded sentiment has dissipated. He prioritizes risk management and aligning with his trading edge.
Counter Trend Approach and Return Degradation
Jason's strategy can be considered counter trend, as he focuses on participation rather than price trends. He experienced return degradation when running a systematic CTA fund, leading him to add discretion to his trading decisions. He believes that returns can degrade when using solely program trading approaches.
Jason Shapiro has been a trader for 30 years and was interviewed in the Unknown Market Wizards book by Jack Schwager. From early on Jason was a rebel who avoided group think and sought out contrarian trading opportunities in overhyped, or deeply oversold stocks and commodities.
Blessed by early trading successes, Jason retired to a beach in Thailand in the late 90’s and traded his account full time only to experience tragedy less than a year later. The painful lessons he learned drove him to give up his opinions about markets and instead listen to what the market is saying by becoming a great market tape reader.
You’ll hear how Jason finds great trading opportunities through a combination of weekly trader reports, media commentary and news events to put on his contrarian trades.
