
August 22, 2024
Jason Shapiro is a hedge fund manager with over 30 years of experience specializing in analyzing the Commitment Of Traders (COT) data trading futures contracts. After trading for several years without finding consistency, Jason Shapiro analyzed what worked for him through post-analysis to develop a system that is contrarian by nature.
Instead of monitoring the price of an asset as a discounting mechanism, Jason Shapiro’s strategy uses positioning. To make an unrealistic case – If everyone in the world was fully invested in one asset, there would be no more demand and it couldn’t go up any further.
As a futures trader, Jason Shapiro interprets the COT data, seeking out extreme positions on either the long or the short side, to identify imbalances in market positioning. More importantly, the market must confirm Jason’s thesis when a market turn begins to form.
This blog uncovers how Jason Shapiro uses COT data and sentiment to recognize market turns to build strong positions.
Unlock the Secrets of Contrarian Trading with Jason Shapiro 👇
Position, Don’t Predict
People spend too much time trying to predict if the market is going to go up or down. Instead, Jason Shapiro finds situations where your potential return is higher than your potential loss.
Your job as a trader is to make money. When taking a trade, the risk-to-reward ratio should be in your favor allowing you to encounter mistakes but still put up very good returns.
Rather than predicting the future, try to figure out where a potential risk-to-reward is in your favor.
The market is a discounting mechanism – All known information is already in the price of the market. Unless you have some kind of inside information, it is extremely difficult to build an edge trying to predict.
What Jason Shapiro looks for is then, is where things may be over-discounted by looking at positioning and sentiment.
Trader Positioning
Jason brings up the recent example of what happened with Gamestop stock in 2021. The price of Gamestop going up had nothing to do with the fundamentals or growth of the company, but rather traders realized there was an overweight size on the short position by many hedge funds.
A more extreme example occurred in the 1990s with Long-Term Capital Management L.P. (LTCM) and other highly leveraged hedge funds when the Euro was in developmental negotiations.
Different European countries had different interest rates that would need to converge under one centralized currency. Mathematically if one country had a higher interest rate and another had a lower interest rate, eventually they would become equal when the Euro came into existence. Many hedge funds over-leveraged trades against the differences in these interest rates.
At the same time, a Russian Bank trade failed resulting in margin calls against these hedge funds that were all extremely leveraged in the Euro trade. With positioning to the extreme on one side, when the time came to sell, there was no one to buy resulting in large hedge funds going bankrupt.
Commitment Of Traders
The Commitment Of Traders (COT) data is released every Friday and discloses positioning from three types of traders.
- Commercials – Hedgers that receive lower margin rates. Example: Gold Miners (Red)
- Large Speculators – Traders with reportable positions that exceed a certain position size (Blue)
- Small Speculators – Traders without reportable positions due to small position size (Yellow)

Of the many ways to use this data, Jason uses the COT as a way to pick market turns by looking for speculators to be extremely one-sided. This implies speculators are over-discounting the fundamentals or current market trend.
When positioning is noticeably unbalanced, Jason waits for a News Failure to Confirm the reversal.
Buying, or selling, the market turn allows for tight risk control. If the price of the market continues the trend, then the trade is taken off at a small loss. After the trade is taken, once the speculator’s and commercial’s positioning rebalances to equilibrium, Jason will exit the trade to secure a profit.
Jason continues to explain how the COT can identify
- The best market for a trend-following trade
- An exit strategy for a momentum trade
- When a bubble is about to burst
Fade The Crowd
If 90% of traders fail, then why not fade the crowd? When everyone starts to say the same thing, that starts to indicate where the consensus is and to start looking for a market turn.
Use CNBC analysts and social media “financial gurus” and listen to what the people are saying. If everyone is seeing the same thing, then the positioning is already discounted in the market.
If there’s widespread agreement then begin thinking:
- Should I be in this trade?
- Should I reduce?
- Is this the end of a trend?
- Will there be a reversal?
These are the moments when you should be making a hypothesis to fade the crowd but most importantly do not place a trade yet. Wait for the market to confirm your thesis when the price moves in the direction of your thoughts.
News Failure Concept
When the COT sets up a trade and market conditions are met, Jason spends time analyzing trader sentiment to determine why people are either so bullish or bearish.
A recent example is when the stock market bottomed in October of 2022. At the time bearish sentiment was dominant due to rising inflation fears coupled with concerns of rising interest rates.
The day the market bottomed was on a CPI report that came out higher than expected which ended up being the highest CPI print of the market cycle. This extremely negative news pushed the market lower in the early part of the day but finished higher on the day.
What this signaled was when bearish sentiment overwhelmed the market, more bad news could not push the market lower. There was no one left to sell which resulted in the market bottoming and then heading higher.
Key Takeaways From The Market Wizards series
The number one overarching theme of all the Market Wizard books includes each professional trader consistently talking about risk management and taking small losses.
Learn how to minimize your losses. It is not the most fun part of trading but it is the most important aspect to maintain profitability in the markets.
No one can predict the markets, but every trade can be planned to ensure small losses. One of Jason Shapiro’s biggest edges is taking quick losses when the trade turns against him and states “If I am some kind of market wizard, it has everything to do with the fact that I take losses better than most people.”
Unlock the Secrets of Contrarian Trading with Jason Shapiro 👇
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