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System Spotlight: Daybreaker

March 8, 2004

 

While many day trading systems have been less than spectacular over the past eight months, blaming an ever shrinking daily range and anemic volatility reading, Creative Breakthrough's Daybreaker system has shined, making money in 6 out of the last 8 months. Why is this system, which has been around longer than Compass and R-Mesa combined, such an unknown? Let's shed some light on Daybreaker.

Who is the Developer?

The Daybreaker system was developed by Mr. Jack F. Cahn, the President and founder of Creative Breakthrough, Inc.("CBI") Jack achieved his Bachelors of Art from the University of Missouri - Columbia, with a double major in Psychology and Philosophy in the 1970's, and launched Creative Breakthrough, Inc. in 1989 to bring his insightful ideas on technical analysis to the market - registering the company as a Commodity Trading Advisor that same year.

Mr. Cahn has been involved with various aspects of technical analysis for nearly as long as it has been researched and studied. He is a long standing member of the Market Technicians Association, having been a director from 1990 through 1995, a member of the Australian Technical Analysts Association, and an affiliate of the International Federation of Technical Analysts (IFTA). He was also one of the first to earn the distinction of Chartered Market Technician, CMT.

Before founding Creative Breakthrough, Jack was the Chief Technical Market Analyst for R. Rowland and Co. (1986 to 1989), Assistant Technical Market Analyst at Sherson Loeb Rhodes (1982 to 1986), Assistant Technical Market Analyst Merrill Lynch (1977 to 1982), and Technical Market Analyst for Stix & Co. in St. Louis (1974 to 1977).

Jack is a citizen of the United States, but calls both the USA and Australia home, choosing to spend a portion of the year down under. Other programs offered by Creative Breakthrough include Early/Late Breaker, Play Gap, and Mad Dog, all of which trade S&P futures.

How does it Work?

The Day Breaker system utilizes a completely different concept to day trade the S&P 500 futures. Day Breaker is unique in the fact that it utilizes CBI's proprietary market condition indicator %C (percent contraction). In essence %C anticipates when the market is about to go into a breakout - a dynamic mode - after a prolonged range or flat market. In this case the system wants to capitalize on the market when it has reached an extreme in the trading range and is prime for breakout. Alternately, %C anticipates when trends are extended and reversal of support or resistance should be expected. In the latter case, the system is looking to enter off support or resistance.

What makes %C unique is that most systems key on market direction, not market condition. By doing so they're trading in a two dimensional environment. They are missing a critical element in their trading system. They only have direction and price in a vacuum. The ultimate question for all traders is, do I enter on a reaction or do I enter on a breakout? CBI's %C indicator is a market condition index that helps answer this question.

In behavioral terms, when tension levels are high in the market, both bulls and bears are being frustrated by a lack of follow through in any single direction. %C measures this tension, with a high reading signaling a breakout is very near. Alternately, when %C has a low reading, it is calling for a shift into a trading range condition and suggests that traders look for reversals off of the current trend's extremes.

The direction of this mathematical formula is also important. In general when it is ascending the market is in a trading range or choppy market. This is a condition where breakouts should be faded, buying breakouts below the low band and selling breakouts above the high band. In other words, selling at resistance and buying at support. On the other hand, when %C is descending, it is calling for a trending condition and breaks of support or resistance should see follow through.

The developer actually calls Daybreaker the "%C-Day Breaker", and refers to the systems as the "Master day trading system", since it trades two major market conditions: the breakouts and failed breakouts. In a sense, it is diversified within itself. It is designed for the large S&P and large Nasdaq. The price levels %C-Day Breaker uses for support and resistance are fixed for the day. Each is a product of the previous day's range

Attain Comments?

Since starting off on the wrong foot at Attain Capital in July of last year, (seeing losses of -19%) Mr. Cahn's Daybreaker system has been one of the top performers at Attain since, reeling off six profitable months out of the last eight while returning over 45%. It's secret, taking profits.

The system has seemed omniscient in the current small trading range environment, as its tight trailing stop has allowed it to lock in profits at close to daily swing highs or lows while other systems have seen those profits disappear as the market has no follow through to new highs or lows.

While this tight trailing stop appears very attractive in the current environment, investors could be disappointed in the future if trading ranges return to much wider levels, and the Daybreaker system is left with a small profit on days when other systems catch a bigger portion of the daily move. When and if the S&P futures trading ranges will return to such levels is a huge question mark, however, and it's hard to argue with results. As the old saying goes, "No one ever went broke taking profits"