Contrarian Rambo

Greetings indigenous peoples of Evil Speculator. I’m back at the controls while Mole is recovering with medicinal bread pudding under the watchful eyes of expert soulful recovery practitioner Ms. Mole. Under her skillful care, ensuring he is back better than ever is simply a matter of how shortly.

When it comes to discretionary trading, the potential for abuse is ripe. Usually that abuse shows up in the form of creative interpretation of the rules, or flat out tossing them out the window. Discretion means applying discretion within the rules, not outside of them.  

As such, all trading needs rules. If you’re not sure why, then the best thing you can possibly do is to head over and check out Mole’s System Building Master Class. Likely, it will win a Grammy for Best Trading Course EEEEVVVVEEERRRRRRRR. It is a masterpiece.

Trading offers so many excellent paths to self destruction that it’s hard to pick one. Paralysis of choice at it’s finest. Do I blow my account up with a few trades risking 25%? Or just go for 10 lotto ticket trades risking 10% each? Or maybe put it all on PG earnings with some options? I heard a rumor from a secret insider on Seeking Alpha about essential oil wicked Pampers launching in Q3.. shit is a game changer for PG. 

As such, we need reality checks around our trading. DEEP reality checks. Today I’ve assembled a 3 step process for potentially enrolling yourself in Contrarian Anonymous. From years of trading, probably the biggest impediment to most traders success is admitting they have an addiction to being a contrarian. They missed the boat, so instead they turn into a troll.

Follow along as we diagnose this silent killer.

When it comes to discretionary trading, there are essentially three main categories of trades:

• Momentum
• Counter trend or failed breakouts
• Scalping/Mean Reversion

These are fairly simple, I trust anyone reading this knows what they are. A simple way to improve our success is to hunt the right type of targets. If I’m looking for momentum targets, most days I’m not going to set my sights on PG, MO, PM or JNJ. 

Likewise, if I’m looking for a mean reversion target, I’m probably not going to short NFLX when it’s made a 5 standard deviation move up within 60 minutes of the open. And if I’m looking to scalp, I’m probably not going to be long VXX anytime soon. 

My most successful algo, that I really haven’t touched in 3 years, is the Mean Reversion Warrior. As the name implies, it’s a pure unadulterated mean reversion algo that runs intraday (or day trades if you’re new to the trading party). Except in developing the VWAP Warrior, I found a bug in Mean Reversion Warrior that’s been there since the inception, and it still my all star.

Step 1 – Trade The Right Things

Step 1 in the Contrarian Anonymous 3 step program is admitting you’re trading the wrong targets and then start trading the right targets for the type of trading you’re doing. Guess which one of these groups of stocks is in the universe that the Mean Reversion Warrior trades on?

Group 1: PG, MO, PM, JNJ

Group 2: NFLX, TSLA, LK, MA

Group 3: VXX, UVXY, URPO

If you selected Group 1, take a moment and golf clap for yourself. That shouldn’t be shocking that a group of consumer discretionary stocks is highly mean reverting intraday. JNJ isn’t coming out with sage infused baby shampoo anytime soon that’s going to add 20% to earnings. Or ever.

If you want a way to quantify that, I’d review some of my previous posts where I babble about the Hurst exponent. Or sir Quant Jesus Dr. Ernie MF’n Chan’s second book, chapters 2 and 3. 

The Hurst exponent is a simple way of measuring how mean reversionificating a stock is. Sidebar: the great Jesse Jackson has modified the English language such that any noun can be converted to a verb by adding -ificating to the end. 

The Hurst Exponent scale ranges from 0 – 1. A low number near 0 is strong mean reversion and a high number near 1.0 is strong momentum. See, it’s a geeky quant thing.  But most humans, that don’t take summer brush-up classes on Laplace Transforms for fun can understand and use that.

If you apply the Hurst exponent to 1 minute intraday price bars, you’ll find that the Group 1 stocks score very low on the Hurst exponent scale. Which in English means they are mean reverting.

On the contrary, if you look at things like UVXY or NFLX intraday, you’ll find they score much higher on the Hurst exponent scale, which means they tend to trend. Again, not shocking. These things have huge volatility and when they go on a march, it’s scorched earth policy in whatever direction they are headed. 

So if you can climb over this DUH!, you can probably improve your trading results: trade the right type of animals for the type of trading you’re doing. 

Step 2 – Go With The Flow

Now that we’re trading the right type of targets for the type of trading were doing, the next step is to toss counter trend trading out of your discretionary wheelhouse. Just forget about it. Find a new jam.

Unless you are highly sophisticated and have information beyond what you’ll find on a chart full of indicators, you’re likely to get steam rolled trading counter trend. I don’t know why, but almost all retail traders love to be counter trend or Contrarian Rambos. Counter trend and counter profitable trading accounts tend to go together.

For a brush up on counter trend, check out Mole’s excellent tutorial on it in the Price Action Master Class.

I really don’t get it. After reading some of the comments in the comment section with people posting their setups, I’m just baffled why anyone would short something that is in full out bull mode, destroying anything even thinking of blocking it from going higher. Or trying to take counter trades long on something that is getting melted down with professional grade brute force shorts, like many of the energy stocks.

But if you insist on shorting things that are running full steam ahead, I’m going to throw you a bone, pat you on the head and have some compassion. Here is a freebie: LK, Luckin Coffee, just made it on the institutional Hard To Borrow (HTB) list. With 5 million shares a day of average volume, it’s not exactly thinly traded. But it’s relatively new with the IPO showing up back in May. So are UBER and LYFT, both recent making their IPOs. If you insist on shorting one of these, I’m giving you another treat: LYFT is on the HTB list, UBER isn’t. 

Mole gives you golden setup treats and today I give them to you in the form of institutional hard to borrow forbidden knowledge treats. Even with this knowledge, I have no intention of shorting these if they are ripping higher and I even a nice long trade in LK Tuesday afternoon. 

Step 3: Stick to trading with the trend

OMG!! NO WAY!!!! Trade with the trend? What a novel idea! Wow! That’s AMAZING! Who came up with this dazzling breakthrough concept!?!?

But who would want to do that? Trade with the trend? That’s so boooorrrrrring. I want to go against the trend and come up with elaborate theories on why it’s the best (worst) idea ever. And then just to make sure I feel good about my theory, I want to find a random chode on the Motley Fool forums who agrees with me! Now that’s exciting! Even better if he types in all caps, that must mean he’s done extensive due diligence on his contrarian opinion… I heart the internet.

Yes, going with the trend is boring. Mole and I have both always said if you’re doing trading correctly, it’s kind of boring. Find other ways to entertain yourself. Here’s a couple of trades from the VWAP Warrior the past few days. This one is kind of a no brainer, would you get short at the VWAP breach here in TLT yesterday?

Some simple observations: TLT has been up for almost the entire session and it’s spent the majority of the session above VWAP. As such, it’s statistically much more likely to find support at VWAP. I did say statistically. 

Not guessing. Not a hunch. Statistically, which means we can back that up with some simple probability.

Yet Contrarian Rambo is loading a short arrow, with dynamite taped to it, into his quill and blasting one off at this VWAP Dreamliner coming in for a refuel at a VWAP breach. He’s likely to have the arrow boomerang back, stick in his ass and explode. Everything about this short trade just flat out sucks leaky colostomy bags. 

Both of these bounces off VWAP were 2.5+ frogbox moves in TLT yesterday. If I was looking for something to short, things like PM were much more fruitful.

We can see that PM spent the majority of the session below VWAP. Any breach of VWAP, or near it, would be another opportunity to get short. PM was a turd all day. Yet I see traders making up dillusional commentary about what PM might do in a case like this,  such as “PM finding support and heading higher…”. Fool must be trippin. This turd was taking the express lift to the London Underground, only it broke and ended up going 9 stories below ground. PM put 5.54 frogboxes of range on the board, almost 3 standard deviations beyond the mean.

If you’re looking for long targets, find things that have spent the majority of the session above VWAP. And if you’re looking for things to short, find things that have spent the majority of the session below VWAP. That’s it. No indicators. No math. You are now pronounced cured of your contrarian addiction.

There are between 400-600 stocks that have enough volume to be day tradable. A bit less with larger accounts, but there is no shortage of better parties to go. So if you’re looking to short something, why not shoot something that’s already in a death spiral? THAT’S BOOORRRRINNGG!!

Boring is how this MF’r gets paid.

Quick and to the point today. Get, grab, in-out. Cheat sheet review:

1. Trade consumer discretionary and other organizing-your-sock-drawer grade boring stocks for mean reversion/sideways trades
2. Forget about counter trend trading. Completely. Torch the idea. For real. Don’t even make a note to circle back to it.
3. The trend is your friend. Stick with it. If there is any doubt, then it’s not a trend and find a new trend party to go to. There are many to choose from. 

We’re rolling up on the opening bell and it’s about show time. And I need to catch a flight down to Flori-duh shortly to pickup my new ultimate Burning Man playa machine, Burn Force 1.

MOLE’S SHAMELESS PLUG

I am delighted to announce the official release of my Price Action Masterclass which represents a cumulative six months effort to produce a comprehensive tutorial on reading and understanding price action without the use of superfluous indicators.

This extensive series covers everything I have learned in nearly 20 years of interpreting price action for my own discretionary setups. You know, the same ones I have been posting on this very blog almost every single day since late 2008.

Please go and watch the first episode of my Price Action Masterclass which is accessible for FREE as a little appetizer. I am pretty confident it will entice you to go and buy the whole series which I am making available to my core audience here at Evil Speculator at an insane introductory never-to-be-seen-again low price of only $97.

Once Tony and I launch Red Pill Quants it will only be available at the regular retail price of $297. Meaning you are getting it for less than 1/3rd of the official price!

So don’t waste any time and buy the entire series right now while it is available at a highly discounted price.