Follow the Smart Money / COT Analysis

Dunstan,

Continue please, I am following your thread. Have wanted to look at COT report for couple of years now, but have been to busy with my intraday trading and system development. So, if you can give a good tutorial on this forum, I for surely will benefit. As I am sure, many others would also. Your challenge would be to make this tutorial/introduction a high quality piece so that people don't start to lose interest.

Thanks again.
 
Hi gmst,

Thanks for your compliment, I will do my very best to keep the quality standard high :)

Please let me know, if you have any questions!
All the best,
Dunstan
 
Follow the smart money / Large Speculators

It is important to see that in the long term, Large Speculators are the ones, who are following the trend, so it is important to have your eyes on them all the time. In the following example you should see what I mean. :)
 

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The last interesting signal I would like to show you, is actually relatively new to me as well, I’ve read it here, the so called “Commercial Capitulation”, let me quote what they said about it:

Commercials hedge the most when they believe that the actual price is very favorable for them to hedge their future production. While they have an information advantage, they still cannot know the future. Sometimes, major shifts occur, that forces Commercials to unwind their hedge positions. Since they generally have deep pockets, their stress barrier is high, but not absolute. As the losses grow to critical levels on their trading accounts, they have to liquidate: buy back short contracts or sell the longs. These trades further fuel the steep price moves that caused the unfavorable situation, so the positive feedback loop leads to parabolic price rises.

It happens very rarely, but I think it is good to know about it when you look at an All Time or close to All Time extreme situation, where you are thinking of a big trend reversal… it not always happens!

I’m attaching the cotton example here, but on a longer, five years chart. I have indicated with a red line the place, where there was a very large COT extreme case, Commercials were at roughly 70000 contracts short, so at the time one could have thought that it’s a good short opportunity… Well it turned out that it was one of these cases and prices just skyrocketed from there.
 

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Hi everyone,

I figured that now that I have more or less talked about all of my COT analysis tools I use, I should start something else.

I’m still open to any questions regarding this topic, so please don’t hesitate to ask!

There is a so called “Weekly Commitments of Traders Review” that is published every week on YouTube and gives a sneak peak on the most active markets – regarding the COT report. I thought that I could pick some of the markets mentioned in these reports and give you my own thoughts about them. How does that sound?

The most recent report can be viewed here.

2-year Note

There was a -39% change in the Commercials positions, they changed their net short positions from -100.000 contracts to more than 210.000 contracts short. The attached 1-yr chart shows that there was one similarly large change in the past one year which resulted in a price-decline in a few days.

The other interesting thing to see is that the COT picture is pretty extreme, Small Speculators COT Index shows 99%, while the Commercials COT Index shows 1%.

All this looks pretty bearish to me, and as the report said, it could be a good risk/reward trade, because there are some close stop levels not far.

If you don’t feel comfortable to trade futures, don’t forget that these days there are other great instruments as well --> ETFs. This page I found has a list of them. You can trade them like stocks!

All the best,
Dunstan
 

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Thanks for the great posts Dunstan, much appreciated! I am also keeping up with the COT videos you speak about.

I am currently developing a trading system based on COT, as we spoke about in the different thread.

Do you know if I can find an up-to-date COT index for free somewhere? On Cotbase.com I found only a paid one.

Cheers.

Luci
 
Hi Luci,

Thanks for your compliment!

Unfortunately I don’t know about any services that provide COT index for free… sorry :(

If it is not a secret, I think it would be much appreciated here, if you shared with us your idea about a system based on COT.

Let me know if you have any questions regarding the topic!

Have a great day,
Good luck to your system!

Dunstan
 
Hi everyone,

The next market that has been mentioned in this „COT review” was the Feeder Cattle, because the second largest change in Commercials positions happened here.

Not only was the change size significant, but if you look at the chart you can see that the whole COT picture is pretty extreme.

I have indicated 4 places on the price chart which coincide with extremes in the COT.

I would like to draw your attention here to the fact that on this market Small Speculators should be considered differently, because a lot of them are actually Commercial players, they just don’t reach CFTC’s reporting limits.

If you don’t feel comfortable to trade futures, don’t forget that these days there are other great instruments as well --> ETFs. This page I found has a list of them. You can trade them like stocks!

Have a nice day,
Dunstan
 

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Beginning in the very early 90s, I used the COT extensively while trading the stock index futures but threw it out long, long ago. You may want to read an article by Howard Simons in the June 1998 issue of Futures magazine. He counters the argument of the vendoring industry that trading on the COT is potentially lucrative. While he was only looking at one market, I tend to agree that it is just another overhyped indicator. Also long ago I use to montior the analysis of the COT guru (seems every indicator has its own guru) and was not impressed in the least.
Can't say it won't work for you but only if you can put your own unique spin on this overly used indicator.

Edit: Here's a link to all the trading bible books on COT analysis


http://cotbase.com/resources/books
 
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