Crowded Market Report founder Jason Shapiro joined the "Investing With IBD" podcast this week to discuss his contrarian approach to the markets and futures trading.
Audio Version Of Podcast Episode
Post-Analysis Improves Trading Strategy
After 10 years of boom-and-bust trading, Shapiro did a hard analysis of his trading journal and figured out what was working and, more important, what wasn't. His resulting strategy brought more consistent returns with less volatility for the next 20 years of his trading.
It was enough to catch the attention of author of the "Market Wizards" series, Jack D. Schwager. Schwager wrote a chapter on Shapiro in his book "Unknown Market Wizards: The Best Traders You've Never Heard Of."
One of the keys to Shapiro's contrarian approach is analyzing the Commitments of Traders data provided by the Commodities Futures Trading Commission every week.
Grouping traders into subcategories, Shapiro walks through how he interprets when the large speculators get crowded on one side of a trade. Then he simply waits for what he calls a "news failure event" to give him a confirmation of a market turn.
Crowded Trade Fuels A Turn But Needs A Spark
Knowing when a futures trade is getting crowded on one side is only one part of the equation. A market can continue in the same direction for a long time even when it is at extreme levels of bullishness or bearishness. Shapiro learned that the hard way in the late 1990s, when he was right about the bubble but too early in his shorting to make money off his thesis.
Using a combination of the Commitments of Traders data and a confirmation of a turn improves Shapiro's chances of success. A "news failure event" can be that confirmation. That's when the market reacts the opposite of expectations given the news.
He gives an example using the October 2022 bottom. When the CPI report came out showing higher inflation numbers than anticipated, a negative response was expected. So why did the market rebound and close positive?
Shapiro explains how this strategy in futures trading put him long in January. He also explains when he exits a trade. Check out this week's podcast episode for more details.
Analysis Of 'Market Wizard' U.S. Dollar Trade
Shapiro finishes the podcast with an analysis of his recent trade in the U.S. dollar. He points out how the position of large speculators changed significantly from just a few months ago, making a long dollar trade in futures trading look favorable.
But he also warns against just following his analysis blindly. Knowing the math behind your own personal risk management is key because "being right" in futures trading is just not realistic.
Shapiro prefers having an expected return four times his potential loss. It lets him be wrong a lot and still make consistent money.
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