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Jack Cahn, CMT

Chairman, Creative Breakthrough, Inc.

Program(s) Developed: Daybreaker Trading System

Interviewed by John F. Gallwas - Founder of Striker Securities

Creative Breakthrough, Inc., is a registered Commodity Trading Advisor ("CTA")and a member of the National Futures Association (NFA #272008), specializing in the development and sales of computerized trading systems that are based on technical analysis of the marketplace. Jack Cahn, its Chairman, started with Merrill Lunch in 1974 specializing in technical analysis using charts and moving averages and is one of the first Chartered Market Technicians ("CMT"). His research on systematic trading eventually led him to start his own firm in 1989 to provide consulting services and trading systems to traders, becoming a registered CTA in 1996. Although Mr. Cahn is a U.S. citizen, he resides in Australia as a resident of both countries.

John Gallwas: What originally sparked your interest in trading?

Jack Cahn: CHARTS! From high school I had developed an interest. When we had the project of picking a portfolio in economics, the idea of earnings per share just did not make sense to me. I also remember sitting with my Dad at his broker?s office watching the Trans-Lux Ticker tape scroll past and my sense was that the tape was the language of the market. In fact as a boy when asked what I wanted to be when I grew up, the answer was always different to all the other kids because I wanted to be a stockbroker not a fireman. My reading material later on was the Mansfield's pocket charts and eventually the McNeil Stock Option weekly chart book.

John Gallwas: When did you make your first trade, and what do you remember about it?

Jack Cahn: Excluding some ad hoc stock option trades back in the 70?s, the bull market of the 1980?s was my first disciplined trade. I was a swing trader of only deep in the money put and call options on the OEX. I used only OEX options as close as a 1 to 1 delta's as I could find. I was well versed in "wave counting" and "ratio analysis" from my liaisons in the business. I used a 60-minute reading of the index to plot the index by hand. One of my trades early on was 20-lot call option; I had bought on a .236 retrenchment back to the level of the 4th wave of lesser degree and was looking for a measured move to new highs to take profits. Well I hit my profit target and more, as the 5th wave extended to be the same length as the 3rd. I made $16K, which was big money back at that time.

John Gallwas: Who were your market mentors?

Jack Cahn: Of course, because I was at Merrill Lynch, Robert Farrell, the well-known Chief Technical Market Analyst of Merrill Lynch was my first mentor. I learned to read the internals of the stock market and the language of the markets, and to understand that the market's movement is totally a behavioral science based on the supply and demand, which greed and fear generate. I also learned that all the various decision making of all participants is reflected in one thing and one thing only, and that was price. In other words, price precedes news: the market is a discounting mechanism. To use one extreme example to make a point: the Dow index peaked on May 18th 2001 and was nearing new lows 9/10/2001; history was made followed by a panic low September 18th.

John Gallwas: Did you learn from books and/or seminars?

Jack Cahn: Not from the attendee?s side of the podium. I did however learn a great deal as a speaker at conferences and seminars. The insights and questions I heard from people who attended seminars were of great value. The biggest question that became clear was how such an easy job of execution becomes such a very complex task for so many, including execution slippage issues. It became very clear to me that a person with a good analytical mind was often unable to act because they asked too many questions and in some cases they where just asking the wrong questions, creating doubt and paralysis.

John Gallwas: Please tell our readers about your "Daybreaker" trading system.

Jack Cahn: The systems are simply based on success or failure of the market, and to capitalize on that success or failure. Day Breaker?s support and resistance zones are fixed for the day as opposed to volatility bands (like Bollinger bands) that move with price during the day. The ability to know when there may be an edge to trade the breakout or to fade the breakout is part of the formula. Traditionally, action above resistance turns it into support, so a move below that price zone calls the breakout a failure. Alternately, action above resistance that gets a certain amount of carry-through labels the breakout successful, and traders go long. Day Breaker has incorporated this traditional concept into its systems but I have also added a filter called %C, for percent contraction. %C is a measure of market conditions. It indicates when the market is coiled up like a spring set up for a trend move or to breakout. It also indicates when a trend is extended and to fade a break as well as telling the system to take profits.

John Gallwas: In your trading, are you a home run hitter or do you try to hit for average?

Jack Cahn: Yes and Yes. I have swing traders, I have day traders and I have scaling systems. My comfort zone is position trading, which I love. But the most popular systems I have are for day traders. I understand what it takes to get a win before the market closes, but for me to do it is too demanding on my time. I find swing trading more relaxing. I do like real life analogies to trading, as life is like trading in many respects. All my systems hit for an average, and in trading: 90% of all profits come from 10% of the trades. Having a system that can keep you in the game and profitable by producing a winning average is where I am, but the systems will hit an occasional home run. There is one key point on the "10% of trades producing 90% of profits" rule. If the trader has a strategy - a trade sizing and a market-weighting strategy - to put more leverage behind a certain market systems when it is in that winning 10% zone, it will dramatically increase his overall return. Trade sizing and market weighting are a part of my total strategy.

John Gallwas: Do you find it more effective to focus on one market sector, or do you trade several sectors?

Jack Cahn: You have to define what your goals are to answer this question, as you might if you were a hedge fund or a mutual fund. You ask yourself: what I am really trying to do, and what amount of risk I am willing to endure to achieve the goals. With that said, I focus on all the market systems that are liquid enough to trade with size and which have electronic access. From there I push on what is hot and pull back on what is not, all within the confines of Day Breaker. The goal is to double initial capital in a year.

John Gallwas: Did you have early success with your trading or has the learning curve been steep?

Jack Cahn: No on both questions. The first few attempts at trading were on a very small scale, trading out of the money puts and calls on stock options. After giving up a few thousand dollars, I opted to learn from the best, so I hooked up with analyst / traders that from inside the professional associations I belonged to for insights. I made the transition from options to futures after the ?87 crash and picked up systematic approaches from some of the heroes of the day like Dick Douchin. There is no need to go out and re-invent the wheel.

John Gallwas: Is your trading strategy fixed or a work in progress?

Jack Cahn: Yes, the systems I trade are fixed, but there is always a work in progress. A real trading strategy is neither a fixed block of concrete nor is it changing at ?Sundown?. The variable inputs are set and the set-ups for entry are fixed and the types of exits are in place. There is no ongoing optimization. However, my methods allow me to improve the system without changing the basic system, like discovering a new exit and adding it to the strategy. Furthermore, there is always work in progress on asset allocation to the market systems available and the trade sizing applied to each. I feel strongly that the answer puts the question into its proper perspective.

John Gallwas: Is there anything in the "What's New" department that you can share with our readers at this time?

Jack Cahn: Play Gap is a stand-alone system I developed back in the 90's to day trade the big S&P. At that time, along with Day Breaker, it ranked in the top ten at Futures Truth Magazine for many months. After the large S&P split, the contraction of the high / low range Play Gap fell out of favor. What is new is its resurgence with the advent of the e-mini markets. I am now upgrading Day Breaker by cutting into Play Gap code to improve Day Breaker's overall risk reward.

John Gallwas: What percentage of the day do you actually spend trading or researching the markets?

Jack Cahn: With the advent of trading automatons, very little. All the work is done the night before in terms of any trade size change. For example, we might trade more contracts in gold and less in copper based on our trade sizing strategy, or for the month we might put more leverage behind crude oil and less behind the euro based on a mathematical strategy.

John Gallwas: Do you trade full-time or are you involved in other businesses? Jack Cahn: Yes, 101% of business involves trading, from systems to FX advisory for brokerage firms to managing money and networking with professionals like Striker Securities. To help the trader level the playing field. John Gallwas: What are the problems a new trader may face in operating a trading system?

Jack Cahn: Don't second-guess your plan! Most traders are riddled with doubt from many different points of view. It is not just the pressure that the market puts on you, and you end up doing the opposite of what you should have done, but other pressures such as cynical peer pressure, client request, news pundit's comments, and home life issues. These traders especially like to do tinkering during real time hours when they are at risk! Once a trade plan is constructed - be it based on mechanical strategy or forecasting - the trader needs to follow the system, for the period of time allocated, to completion. Also, it is important to realize there is a difference between being a strategy developer and a trader. Most people get the two confused because they do not understand that they require different talents. As a developer, I have learned to be selective with who my clients are, and cynics or a nay Sayers are not called back. Optimism and confidence are a part of a winning game plan, and my focus is on building a clientele of winners.

The preceding information not guaranteed to be accurate by Striker Securities, Inc. and does not constitute a solicitation of any kind. For further information, contact Dan Neenan at 800-669-8838/312-987-0043

This interview is for informational purposes only and is not intended to be a solicitation of any kind. Trade only with risk capital. The risk of trading can be substantial and each investor and/or trader must consider whether trading systems are a suitable investment.