Follow the Smart Money / COT Analysis

Hi 007Arb,

Thank you for your post! It is exciting to meet other traders here, who have been using COT analysis in their trading before. It would be much appreciated if you could join this topic and share your experiences with us or just give your thoughts about some of my conclusions I have made!

I believe that COT analysis on its own is not enough. I think it can be used in two ways: one way as a signaling tool, the other way as a confirmation tool, but in both cases one should have a solid system for trading, a system that can help you enter and exit trades.

In my thread I do not wish to go in to any specific system recommendations... I would be narrowing down the usage of it (COT analysis) to one type of time frame and tactic, which could leave out other great trades on different time basis and different strategies. What I mean by this, is that there are traders out there, who might be trading on shorter time frame, for example only on forex or a trader who prefers options on metal markets and on a longer time frame (from few weeks up to a couple of months) and they will be viewing the specific “formula” from different angles.

A lot of traders out there still do not have an idea, or might not even heard about Commitments of Traders Report. My goal is to introduce them to it and teach them the basis of COT analysis. After that it is the challenge of each viewer of my thread to do his or her historical analysis and back test their system with the integrated COT report.

What I do believe is this: Using COT analysis integrated in a tested system can filter out some bad trades or it may focus one’s attention to trading opportunities that the existing system might not have found on its own.

I think of COT analysis as a “car-part” --> It is like a GPS navigation system, or the windshield etc… Like let’s say the MACD histograms or bar charts or EMA-s are wheels, door knobs etc… I would say that a car on its self cannot get from A to B with only the wheels or only the engine. But a good combination of these elements can make a good car and that will definitely get you from A to B.

May I ask you if you have used the new type of COT reports in your trading yet? I’m talking about Disaggregated, CIT and TIFF reports that CFTC publishes these days… The service I use offers these reports as well, the charts look very interesting, but I haven’t started any “deep investigation” yet… have you?

All the best,
Dunstan
 
Quote from 007Arb:

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.
More...
---> http://www.amazon.com/Gary-Smith/e/B001IR17M4/ref=ntt_athr_dp_pel_pop_1
 
Hi everyone,

It’s nice to see so many replies, let me reply to them one by one:

mr double

I have attached two charts for you, one for the USD Index and one for the Yen -->

USD Index: The COT picture is relatively extreme if you look at the COT Index for example. I have indicated with red lines the places on the chart which coincide with similar COT pictures in the past. It would be difficult to predict when prices would decline on this extreme picture, now or in a few weeks.

Yen: regarding the COT picture, there is nothing special.

I don’t think that from the above analysis, one could make a solid conclusion. As I have written above, COT analysis on its own might not be enough to come to a trading decision.

I personally don’t think – based on purely the COT analysis above – that USD/JPY is the market which carries great opportunities at the moment; I might look towards other markets where the Commitments of Traders report has more solid signals.

dandxg

I agree with your opinion here, COT analysis could more useful on a longer time basis.

Option Attack

Thanks for the link!

Regards,
Dunstan
 

Attachments

The most recent COT report, the 30th report is out:

COT review

I’ll give you my view on this report in the following days, meanwhile check it out and if you have any questions, let me know!

Have a nice day,
Dunstan
 
The first market that was mentioned in this review (see my previous post for the video) was the sugar market. I think it is a great example for those of you, who would like to understand how to use the COT change indicator, what does a specific change size mean.

The sugar market’s 20% change (on a 52-week range)in Commercials positions illustrates well that a 20% change may be considered large in one market, while in another market it happens pretty often, so it might be negligible there. You have to go back in time and see if that change size is really significant or not.

If you look at the 1 year chart below, you will find that similar or even larger changes have happened in the past and not that rarely. Now does this mean that this 20% change will not have any effect on the price? Well I’m sorry to say this, but you have to do your homework, do a little historical analysis. I have indicated on the 1 year chart those situations when there were similar changes. I would say that roughly 70% of the time, such a change size had an effect on prices. Ok, now you might ask, whether this time it would have an effect or not. My answer to this question is: I don’t know. It’s all about chances… I think – looking at the chart – that this change size could move prices lower in the near term, but if you have a look at the 5 year chart, you can see that we are not at an extreme COT level for neither market participant, which makes it more difficult to predict a direction.

Besides understanding to read COT signals and see what effect they might have on prices, I think it is also very important to know when to step aside from a market.

I’m not saying that Sugar does not have opportunities, but I think one should always consider the risk/reward of the trade and search for those few markets where this ratio is more favorable.

I’m personally looking for those situations when the picture is very clear, and you don’t need to do much thinking :)

All the best,
Dunstan

New to COT? Read my first couple of posts in this thread or check out this video for more info
 

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