Learn Trading Under The Guidance of Vivek Bajaj + 4 Mentors - Know More

Unknown Market Wizards

Jason Shapiro: The Contrarian

Jason Shapiro’s trading dates back to 2001. His returns were dependent on the fluctuating target volatility defined by the allocator.


At a 20% target volatility, his average annual compounded return is 34.0% and his maximum decline is less than half of his average annual return at 16.1%. 


Shapiro’s volatility is inflated by numerous large monthly gains hence his volatility level overstates the implied risk.


His return/risk numbers are extremely powerful, with a Sortino ratio of 2.83 and a monthly Gain to Pain ratio of 2.45. One remarkable aspect of Shapiro’s record is that his returns are negatively correlated to stock and hedge funds.


Given the developments of the past few decades like algorithmic and high-frequency trading, artificial intelligence, the expansion of hedge funds, it was still possible for Jason Shapiro to beat the market as an individual trader.


At its core, Jason’s trading success is rooted in exploiting the shortcomings in the emotion-based trading decisions of other market participants. He prefers to go short when bullish euphoria over-rules and to go long when bearish sentiment is prevailing. 


While the market structure, the nature of the participants and the available trading tools have all changed dramatically over time, the one thing that has not changed is human emotion. And it is the perpetuity of human emotions that assures that trading opportunities will continue to exist.


To trade like Shapiro, one will have to go against his innate human instincts. 


For a contrarian trading approach to work, entry into markets is critical. There are two vital elements to Shapiro’s approach:

  • Taking positions to contradict the extremes of market positioning
  • Timing those entries based on market action.

Shapiro depends mostly on the weekly Commitment of Traders (COT) report to determine extremes in market sentiment. He prefers to be on the opposite side of extremes in speculator positioning, or equivalently, on the same side as commercial positioning. As a supplemental input, he also uses financial TV shows which can be useful in trading as a contrarian indicator!


To time his contrarian positions, Shapiro looks for reversals that occur despite a prevalence of news on the contrary trend. 


Markets bottom out on bearish news and top out on bullish news. The general reason would be that fundamentals are only bearish or bullish relative to price. At some price, the news is fully discounted.


However, Jason has a better explanation for this- participation. Markets bottom because speculators are already fully positioned short—a condition that naturally occurs in a situation of relevant bearish news. A similar explanation would apply to market tops.


If there is one absolute in Shapiro’s trading process, it is having a stop-loss on every position. This rule prevents significant losses when the implications of the COT report are wrong. He selects a stop point that negates his assumption that the market has bottomed or topped.


Risk management is not just important for individual trades but at the portfolio level as well. Precisely, traders need to be aware of those times when markets become highly correlated. In such situations, the risk of any portfolio may be much bigger than normal because the probability of simultaneous adverse price moves is higher. Shapiro manages this high correlation risk by reducing his overall position and by adding inversely correlated trades to the portfolio.


Like most other market wizards, he too tells traders not to listen to other people. If they can identify who is reliable & who is wrong, then their opinions can be used on the contrary.

Did you like this unit?

Units 3/13