COT Report Analysis - a thread on market sentiment

Hi guys!
Man…I’m sitting here getting caught up on the thread. Yep your right FE, I feel REAL good having the big dog step in and mention about my post. I am truly honored.

Ok…that’s nice…let’s move on.

I’ll tell you what I have on that.
I’ve kept track since the beginning of the year. This is how I figure it out. Simply adding up the up days and down days, pitted against each other. So, like yesterday, the majors have it, 20-8, and comm’s are 3-15. That means majors all totaled 20 up and 8 down and the difference being +12. The comm’s only have 3 up and 15 down. Difference being -12. That means (the comms): AUD had an up day against the GBP and NZD, that’s 2 of the three. Then CAD had an up day against NZD. That would make 3. I realize just now that I am counting a comm against a comm, and probably shouldn’t be, but that’s how I’ve been doing it. Just adding up the total of who had an up day or down day. And I should mention that if a pair has 10 pips or less, I count as even. I always know who had an up day, down day, or even. And in this regards, I just group all of them into the majors/comms. That’s 5 against 3. And I’ll tell you, it is interesting to see how it always goes back and forth. It’s like I can even predict which one will be on top. But anyway, from the beginning of the year up to now, it shakes out even. Majors have 13 weeks of being up on the Comms, Comms have 13 weeks up, and there was one week when they were dead even. There was 3 different times when the Comms had a streak of being up 3 weeks in a row. Weeks 11, 12 13; 17,18,19; 23,24,25. We’re in week 28 of this year now.
The majors had only 2 different times when they were up 3 weeks in a row. Week 1,2,3; and week 14,15,16. But it’s been back and forth the last 2-3 weeks. Last week went to the Comms. So far this week the majors are up a good bit (+12) with one more day to go. And it’s funny cause it seems like the comms are making some strides back today. I kinda think that they will pull it back to maybe even.
That’s all nice, but it’s still hard to tell WHICH currency in particular will be the strongest of their group. There could be a good hedge strategy in there somewhere.

I’ll give more details later.
Hope you can understand some of that.

Mike

That is a nice study Mike!!! As far as I see the first basic indicator would be: if commodities or majors are up 3 consecutive wins, then we can expect the fourth week will be won by the other party. I think the longest streak was three for one side.

The only downside I see is what you mentioned yourself: I guess it would have been better not to count comm vs. comm and major vs major as they do not really fit into the analysis. More than that major vs. major get 5 points every day comm vs comm gets 3 point only every day. So actually the majors are getting 2 “present points” every single day! This is quite a difference and might lead to an overall commodity victory in the long term. Don’t you want to change ithis from now on?

End do not get fired from your job because of this thread :slight_smile:

Hi FE

Looks like you did good with going with the flow on JPY short. I was surprised this morning when I woke up to find them correcting.
I could be wrong, (for sure), but, it seems like you have a longer term sentiment in place with a shorter term trading strategy time frame. I do have lots to learn about the whole yielding of currencies. What exactly do you mean “higher yielding” currencies? Is it the commodity currencies? In my mind I would only think of that aspect if I was trading on the lonnnngggg term. But, if the players ARE thinking that, then I have so much learning to do.
So my question is is that a major factor in determining a trade in the short term (within a week’s time)?
I guess if the big players are running to the JPY, then it must have some merit.

Some of my thoughts.

Mike

Good point.
I’m gonna revise that. It only makes sense! Maybe just don’t count the in house numbers.

Off to work I go now. I’ll check in (as I always do), during the day.

Mike

Hi Mike,

yes, I like to have a long term sentiment as “trend is my friend” but make many shorter term trades.

Higher yielding currencies are mostly the commodity currencies at this moment but it can be any currency. In the forex world high yield currency pairs means the interest rate differential for the long side. JPY has about 0% so people go against JPY. NZD has the best and then comes AUD. This is an important factor as many traders plan on the carry trade which is extra revenue and they do not want to go short on high yielding currencies. If you read the blog from Pipcrawler he likes expecially setups where he can go long on higher yielding currencies. EUR and USD are very weak, CAD and GBP are a bit better.

Hope this helps.

Ok guys. This is what I got. Probably all what we know already.
As of the beginning of london: ( looking at the 8hr charts for this perspective analysis)
USD, AUD, JPY all tied for the strongest.
GBP comes in a close second.
CHF third, really close to the next 2. Which are
EUR and CAD, which are neck and neck.
NZD bringing up the rear, by a lot.

Notes: Biggest mover I would have to say is the AUD, and that would be on the up.
JPY has dropped a lot.
USD dropped some, but still considered strong.
GBP dropped some, but still relatively strong, not as much though to the USD and AUD.

I think a commodities will come back today and even out the score against the majors.
It is take profit day though.

Mike

Hi FE,

Hows that interest rate is determined ? if it does fluctuate is there a way to find out ?

When I opened JPY cross pairs such as USDJPY, NZDJPY and GBPJPY on higher frame charts , were all trending up with JPY - net positions almost always. And I was wondering why. Is it because of interest rate differential with JPY at 0% ?

Hi rookie and Mike,

as I see we have to clear these interest rate differentials! :wink: Interest rates are one of the most deciding factors for currencies (if not the most!). If you guys read news or hear press releases, interest rate policy is the main question for every aconomy. Journalists always ask: „When can we expect rate hike?” Interest rate decisions are always tier 1 data!

It is hard to say the story short, but if an economy goes good, then they hike rates to slow down inflation and make people deposit their money in banks. If an economy goes bad, they decrease rates to push money into the markets and push the economy, which means people will take out their money from banks.

To calculate in the forex market with an example: NZD has 3% interest rate, JPY has 0% or 0.1% and every night you pay/recieve the interest rate differential for open position at 5PM Eastern time zone. So if you are long NZD/JPY you become money, if you are short you pay. This is a key importance in long-term strategy as everyone wants to recieve extra money. If your trade goes the right direction you earn extra money with NZD/JPY long. If you are long on NZD/JPY but it goes the wrong direction, you still recieve your interest rate revenue, therefor your loss is not so great. With NZD/JPY it is the opposite. So most people want to be long on NZD/JPY, AUD/JPY, CAD/JPY and JPY/GBP.

Interest rates are often a good indicator how an economy is doing. Please ready all the following articles:

Interest Rates 101 | Fundamental Analysis | High School
What is Carry Trade? | Carry Trade | Freshman Year | Undergraduate
How Do Carry Trades Work for Forex? | Carry Trade | Freshman Year | Undergraduate
To Carry or Not to Carry | Carry Trade | Freshman Year | Undergraduate
Carry Trade Criteria and Risk | Carry Trade | Freshman Year | Undergraduate
Summary: Carry Trade | Carry Trade | Freshman Year | Undergraduate

This is necessary knowledge! Good luck!

Hi rookie and peterma,

peterma has read the books, and rookie was learning from that very informative forum thread so I have a question. You two both mentioned the net positions. My question is if it was important for the commercial or for the non-commercial sector? What did you guys read? Which segment do you have to look at for the net position change?

Thanks,
ForExchange

Hi FE,

Williams comes down heavily on the commercial sector, his general reasoning is that they are the experts or the ‘smart money’ in their chosen commodity. He also lists the many times that the small trader is wrong, Briese takes a more balanced view -

“When I started trading in the early 70’s there was not much trader info available. Today there is too much. And to make matters worse, it is filed together with misinformation and disinformation. As a reader of this book your are entitled to be disabused of the worst of these half-baked ideas. Here is a run down in no particular order.”

He then lists those ideas:

Tip - Always follow the commercials

Tip - Net long is bullish, net short is bearish

Tip - Always fade the small speculator

Tip - It is only logical to compare hedging to the seasonal average

Tip - The COT is old news by the time it is released.

Under each heading he details reasons that these ideas are mis-informed.

An example, fading the small speculators.

“This has to be a gimme, right?. …every market book is unequivocal in stating that small speculators are net losers. I cannot argue with this premise. My only reservation is your ability is to find out what small speculators are buying or selling, or how much. The CFTC does NOT release this information…
Now who’s pulling whose leg I can hear you say, are we reading the same report?”

He goes on to note the actual make up of the ‘non reportables’ and that “the small speculator may be ‘dumb money’ but he is not stupid enough to come out from hiding among the commercials in the small trader category”.

Hi peterma,

first of all, thanks for your answer. I remember you were already writing to me earlier to follow the commercials. You read of course the book so you know then the reason why is it like this, but it still does not make sense to me. So maybe you can tell me short.

That is how I see the situation with my logic:
Commercials are there for hedging reasons and not to make money. Non-commercials (speculators) are the winners and there to make money. So it look logical to follow the non-commercial category. Small speculators: they have no idea.

If I understand right your second and third tip, this means follow commercials based on net long or short and never follow small speculators. Based on this, I checked the two bullish currencies for the last months, the GBP and NZD. During the bullish phase commercials were net short and small speculators were net long. So as it makes sense, commercials lost and this time even small speculators made money. Based on the advice in what you wrote, I would have done the opposite and lost a lot of money.

Can you explain this? Thanks

Hi FE,

I was quoting Steve Briese from his book on COT. I think he is trying to make the point that in the COT there is much mis-information, he is thus listing the more common.

I had read William’s book first, there seemed to be answers but there were many more questions still in my mind. He gave great detail, for example, on reading Open Interest.

Briese answers many of the questions. He gives detailed answers on the control that each player category exercises, for example “They (commercials) control the overwhelming majority of the open interest in most markets”.

In his analysis of the common “Tip -always follow the commercials” as frequently attributed to Williams, Briese points out that “you had better have deep pockets”.

Briese suggests where such deep pockets are not required and yet we can follow the commercial action:-

“For most of us, better results will accrue from buying at the moment commercials QUIT buying (or moving short just as commercials STOP selling).
It is rare to see commercials stop buying before prices find a bottom, or to see them quit selling ahead of a top. I use the term ‘commercial capitulation’ to describe these rare events, which are the only occasions when it safe to safe to BUY WHILE COMMERCIALS ARE STILL BUYING.”

On the small speculator thing, Williams refers to the ‘great unwashed public’ I think was the term, and points out how often they have been wrong.

Briese points out the the non reportables include not only the public but also commercial and speculators alike, thus in his words their “net position pattern is a real mishmash”.

For me, after reading William’s book I couldn’t find value in the cot. Then when reading Briese’s book and seeing his final “mis-information tip” I had second thoughts.

"Tip - the cot is old news by the time it is read:

You would not have bought this book if you believed this tip. But for the record, even when the data was released only monthly, and 11 or 12 days after the fact, …I found the cot data frequently pointed out timely trading opportunities.

… you will, I hope, come to appreciate that analysing cot data in anticipation of gaining a trading edge is an attainable goal, but one that requires paying due attention to the details, and particularly to the nuances."

FE, The above tips, quotes and emphasis in both posts are not mine, they are Steve Briese’s, it is perhaps right that we discuss in this thread, in his preface he says:

" You can think of the cot as a sentiment indicator, but instead of opinion surveys, it is based on actual market positions of the largest futures traders. You can also think of it as a fundamental indicator, because it lets you know the market positions - and therefore the price outlook - of the firms who operate the cash markets and who use futures to hedge price risk. When these market insiders move to one side of the market en masse, even swap dealers and hedge funds can get flattened."

BTW because of your prompting I have decided to re-read this book for a third time :slight_smile:

Hi peterma,

great answer, thanks. With the great pocket example it makes a lot more sense! Unfortunately I do not have such deep pockets so I guess I have to wait for the turning point. Which is of course not easy to find because if commercials stop selling one week, they might continue selling 3 weeks later :slight_smile:

You emphasize often that it is a lagging indicator. I understand that and know that but I do not use COT as an exit or entry point, in my opinion a 3 days data usually is not old to view the overall picture. Yes, this week it might be of course old but it is a special case.

And do not get upset because of reading, it is always good to read :slight_smile: Can you wait about 10-14 days? That is when I can start I think reading the 2 books, we can read daily and discuss it “live”. What a great idea! :slight_smile: Just say which book is the first and which one is second.

COT Report 18.07.2014.

Hi readers.

As the thread goes on, that is how some things change to improve myself and basically all of us. At this time the main discussion is which are the most important data of the report and what we have to look for. The main arguments on what I do not cover here is the commercials and the net position, still a question if this goes on commercials or non-commercials.

As far as we do not discuss what makes the most sense to analyze, I still write down the non-commercial changes from the report. I have to say though that this time I do agree that COT report does not really show the reality. The last three days of the week, which are not included in the report had huge changes in the market based on market sentiment (Ukraine-Russia aircraft accident, sanctions on Russia, Israel war). I still write down shortly what happened but I do not write comments while it does not make much sense to me. The week started out as a news week and then everything was changed based on geopolitical aspects. However the last three days of the week will be covered in the report next week.

Here are the non-commercial changes for the last week:

[B]AUD[/B]: 69.47% long from 68.90%.

[B]CAD[/B]: 57.43% long from 54.84%.

[B]CHF[/B]: 36.87% long from 36.42%.

[B]GBP[/B]: 64.55% long from 65.82%. Now the GBP does look interesting to me. Even if we are not looking at the last days, the non-commercials proportion is losing in the 2nd straight week. This is interesting to me as GBP is the only economy in my opinion which is doing well. All other economies have problem, lately even NZD. Maybe is this slowly the waited turning point for the GBP?

[B]NZD[/B]: 70.50% long from 68.44%.

[B]EUR[/B]: 32.72% long from 31.75%.

[B]JPY[/B]: 10.51% long from 12.59%. This data brings nothing. In the last days JPY was rocking.

[B]USD[/B]: USD index shows strengthening.

And now comes probably the most interesting part. We were talking about to write down our strategy of the next week to compare our strategies and discuss it before the market opens. Here are the two strategies that I plan to follow”

  1. I will first look how the market moves until Monday morning. Try to interpret if risk on/off sentiment is still very strong or not. In case the markets are a bit stabilized, then I try to follow the normal news reports and look for short term GBP long trades and NZD long trades.

  2. In case market sentiment changes up and down so strong like last week, which I can expect, I do another strategy. This strategy is based on what happened in the market on Thursday afternoon and then at night. What I mean is the JPY gets strong because of geopolitical situation, but cannot hold on to its gains because of the weak Japanese economy, better geopolitical situation and bad carry trade on JPY. This means I always will wait until JPY gets strong, try to find the turning points and go with more currencies long against the JPY.

I am waiting on your findings and your strategy descriptions, have a nice Sunday afternoon!

Hi FE

Not sure if this will be helpful.

Net position is calculated long minus the short. So it is relevant to both commercials and non commercials. Open interest and changes in net position can be helpful indicator to trade with the stronger side /existing trend/ therefore increases the probability of our trades.

I do get confused about who to follow as well more I read the more complicated it gets. If you look at cot report non commercials usually take the other side of the trade. You don’t really see them taking lump positions on same side. The thread that I was following on forexfactory he followed non commercials saying that commercials are there to hedge not to speculate which makes sense.

But like peterma said with COT report its hard to see what is underneath. If we can’t see through certain information it can be misleading. I’ll stick with non commercials for now it seems to be working.

But I also wonder is it really necessary to complicate things even further. Not saying that we’ll take everything at a face value. Still over complicating things might not always produce more winners than losers.

Hi guys!
Here goes my take.

From out to in, as I see it. The commodity currencies DID edge out the majors. By a small amount. (btw, I did go back and revised the data, which would be comms up and down days against majors, vise versa, with NO in within house comparing, and guess what I got, the exact same figures! Bottom line that is. I subtract away and come up with the difference).
I’ll give you what I got noted from the beginning of the year. See for yourself. These figures mean who edged out who by how many up days. These are the weeks of the year, who was on top, and by how much(total difference in amount of up days).

  1. M +26
  2. M +10
  3. M +18
  4. EVEN
  5. C +19
  6. M +4
  7. M +20
  8. M +12
  9. C +29
  10. M +10
  11. C + 24
  12. C +43
  13. C +4
  14. M +12
  15. M +8
  16. M +7
  17. C +9
  18. C +24
  19. C +17
  20. M +2
  21. C +5
  22. M +6
  23. C +36
  24. C +3
  25. C +16
  26. M +5
  27. C +8
  28. C + 2
    —On friday all three comm’s were on top. So, I will be looking for any momentum this week for the comm’s to make it another 3 in a row.
    —USD has big news on tues am, CPI. USD definitely has some momentum going now (last week). If it comes out good news for them, I will be looking for some short term longs. If not, NOT playing with them.
    —NZD has HUGE news on wed late, rate decision, AND expected to rise again. I will be watching them very early in the week. I think they will rebound much higher since fell a lot last week.
    —GBP has big news on wed am, mpc meeting, and also GDP on fri am.
    —JPY with big news wed late, CPI.

Look…I say that because you watch, (market participants know what’s coming up in the week) there’s always market pricing in before the data comes out. Even a few days out. Their gonna have NZD in mind early this week, and the rest (noted above) also.
I like to go with the flow, and I will jump on NZD if and when they start moving up the latter.
Going with the USD up if figures show good. It also just seems like everyone has been waiting and waiting for the USD to show some real strength. So, once again, we’ll see on them.
GBP…I will jump in on which ever way that moves. I agree with you about them, long. The last 2 weeks they have dropped much. Healthy correction. So, much more room to run now.
JPY… definitely have my eye on the (most infamous and talked about) USD/JPY. If it closes below 101.22, I’m riding that horsey down the road. And on the upside, only will go long when around 102.00 area.

So, I’m favoring the commodities this week.
BTW… last weeks total tally strong/weak looks like this. (amount of up days and down days against each other)

who–up days–down days–no change (The daily candles)

CAD +17 -7 11
AUD +16 -8 11
USD +15 -6 14
JPY +16 -13 6
EUR +11 -13 11
GBP +11 -17 7
CHF +8 -14 13
NZD +7 -23 5

That’s what I got.

Side note:

I also have finally found my particular strategy. It’s been a long time coming for this. I’m excited.
Bottom line is this…IF IT’S TRENDING, I’M IN IT…
I have a medium to long term strategy. And also a short term one also. 2 different time frame strategies.
So, if anyone would see a trend on the charts, I’m gonna be in it. I’m just so tired of seeing some longer term trends, and not being in it. I’m just gonna let them go until their not trending anymore, with much details and money management controls in place. And this is a mechanical method. Signals will tell me what to do. No longer am I gonna GUESS what might happen.

“market…do what you want to do…but if your gonna trend…i’m riding you like a bronco”

Anyway…that doesn’t mean I won’t jump in the market when the opportunity presents itself.
That kind of trading will be just different from what else I have.

So…I’m with you guys on what’s gonna happen this week. Thanks FE for the report!! Just always seem to coincide with the numbers that I compile. I need to hear that! Oh, and thanks for the carry trade links. Good stuff! Puts things into perspective.

I’ll let you know what kind of trading I do this week. First off, tonight, soon after the market opens, will be watching NZD. If they’re moving up, I’m in on some. (they like to take off a lot when their in session)

Mike

Hi rookie,

I think you are very right about overcomplicating things. I also like to follow non-commercials, but peterma is trading probably longer than all of us together and he had read the book of the person who has the longest COT history! I have a deal for you: we stick to non-commercials until I read the book and I can also say what I learned and what should be changed.

About the net change I know what you wrote, just did not know if you wanted to follow there commercials or non-commercials.

I think a lot about these “overcomplicating” sentences. You really are true about that. On the other side the more you see into it, the more you understand and can make more profit hopefully. Of course it is also more work!

I still wait for your trade views for next week!

Hey guys!

There won’t be COT index this time around. I’ll bring the numbers next week sorry for the delay was a little busy this week.

So here’s my outlook it might be repetitive to FE’s report. Hope you’ll find this useful nevertheless without the COT index.

CAD: net position increased from +10,295 to [B]+15,621[/B]
open interest increased to [B]129,787[/B]

CHF: net position decreased from -6,812 to [B]-6262 [/B]
open interest decreased to [B]35,007[/B] from 35,053

GBP: despite some cut in net long positions to +[B]38,770[/B] from +41,639 GBP still remains strong with majority of non commercials long on GBP. Reversal may not be happening anytime soon.

JPY: Open interest has decreased to [B]155,127[/B] from 157,710 with sellers amount 89%. However net short position decreased to -[B]62,948[/B] from -66,375. Looks like some players have withdrawn out from JPY trades last week.

EUR: Open interest with EUR has increased quite significantly from 294381 to [B]310,661[/B] with not much changes in short/long positions in percentage. But sellers have added onto their shorts to [B]-62,84[/B]6 from -59,265.

NZD: While there was some cut in open interest to [B]32,879[/B] from 36,123 last week buyers have added onto their long positions with net position at +[B]15,453[/B] from +14,416. NZD still remains strong.

AUD: Aussie dollar has attracted some attention with increase in open interest to [B]105,209[/B] from 101,860. Long and shorts still remain about the same in percentage. But buyers have added onto their long positions. Net positions increased to [B]+39,743 [/B]from +36,603.

Conclusion

Out of the bunch AUD, NZD stands out with more longs than shorts in percentage last week and the week prior. With both of these pairs buyers have added onto their longs.

While EUR and JPY with more shorts than longs. JPY has had some cuts in net short from previous weeks but still remains bearish.

Trade ideas

I’ll look for trade setups on NZDJPY AUDJPY NZDUSD - > Long
EURNZD - > Short

AUD CPI and HSBC CPI due on wednesday and thursday any unexpected data might change market sentiment. And also with kiwi rate decision due on thursday. Be ware!

Happy trading guys!

Hi Mike,

just a wonderful writing with great tables and description. I liked it so much and on the same thinking in many cases. However it does not make sense to write about things where I agree. That does not bring anything. So I rather point out issues where I find your writing “questionable”:

  1. the most important part is your last subject, not even about analysis!!! I am very happy that you see clear things now (at least you think that!) but I do not want that you just jump into trades like that! You will hurt yourself! Especially since summer is very low liquidity and mostly ranging markets but not trending. If you plan long term trades, then really look the big picture not the weekly which is dependent now on political issues. And calculate risk! For long term trades you need deep pockets like peterma would say. You need stop losses and be ready to take bigger losses. However also calculate with the carry trade factors as you know how important it is. Especially you make me worry about jumping in the market tonight. Do not forget that you will pay more spread and in these highly volatile markets it might be good to see a bit what really happens.

  2. Charts, analysis and writings about currencies I liked a lot with two exceptions on my side. I will definitely not want to jump now into long JPY trades. In my COT analysis I was often long for JPY but it did not happen. Long-term I expect it to get strength. However at the moment I only see the geopolitical factor and no strength in the economy. I also believe in the “trend is my friend” as it has key importance. For me, JPY has no trends, only some temporary strength.

  3. The other point where I am uncertain is the USD. Hmmm I also do not see why it should get strength. The economy does not seem to be great, Fed policy is unclear and rates are very low.

With NZD and GBP I think the same and your findings are interesting. If Commodities would win the next week, it is an indication for use that in 2 weeks probably Majors are on top!

I wish you good luck!

Hey FE!

Thanks for all your input. Good stuff for me to think about! I need all the constructive criticism I can get.

Really good.

Thanks.

Let the games begin.