Follow the Smart Money / COT Analysis

Trading Discussion
1

Hi everyone!

This thread I’m just opening, would like to share ideas about trading in the futures market using a simple but very effective tool, the Commitments of Traders report. I would be very much interested in your experiences and thoughts about this data and how it has helped your trading!

Personally I have first seen this data set roughly five years ago, and “fell in love with it” right away! :7: The concept that amused me at the time was that with this COT report you get a legal inside look in the markets --> you get to know what the main participants of these markets are doing!

If you are new to this report, let me explain to you the basics:

[B]Who provides the COT report?[/B]
The report is prepared by the Commodity Futures Trading Commission (CFTC)

[B]What does COT report show me? [/B]
The Commitments of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. It separates traders into three groups: Commercials, Large Speculators and Small Speculators. Commercials are those participants of the market who either produce that specific commodity or use it for the daily business. Large Speculators are generally big investors, hedge funds holding more contracts than the reporting limits, Small Speculators are the “rest” (you and me:), who hold fewer contracts than the reporting limit. [U]Conclusion:[/U] So basically the report shows you where these participants are standing on Tuesdays.
For an illustrated good explanation, I’ve found a video on YouTube, it explains everything in understandable English what the Commitments of Traders report is about.

[B]When does the report come out and where can I access it? [/B]
It comes out usually on Fridays, but on holidays (such as 4th of July) it comes out usually the next week Monday. This is a free data that CFTC publishes every week and is accessible on it’s site (here).

For many years I had to go through a relatively difficult process of first downloading the COT data, converting it to usable format and then importing it in adequate program. If you check CFTC’s site, you will find that the data there is in a raw format that is hard to read… Well these days there are a few services that provide this data in an easily readable, graphical format. I’ve checked most of them, I think this site can be considered the best. I like it because it has the cleanest data available (combined and corrected data) and all the COT report types that are available today.

[B]Let’s get down to business… How does the COT report help my trading?[/B]
Well since now we know that it gives you a legal insight on major market participants positions, simply – in accordance with the threads title – you just have to follow the Smart Money! Ok-ok… you might say: “yeah, sure, but who is the smart money?” Well doing your homework and studying the historical reports (the classic COT report has been published since 1986), you will easily see that at certain times, especially in extreme COT situations, knowing where the major players are positioned, will help you enter on the right side of the market.

I’ll introduce you to the tools I use in the following post one-by-one. I would be very much interested in your thoughts and ideas, so please share them with me and if you have any questions, I’ll try my very best to answer them!

All the best,
Dunstan

1 Like
2

COT EXTREME signals
I think one of the best tools in COT analysis is the COT Extremes. It basically shows you where the given COT level stands historically. So if a reading says 93 for example, then it means that the current level of Open Interest for a given market participant (C-LS-SS) is at such level, where it stood exactly 93 reports ago.

My experience is, that the larger this COT extreme is, the greater the chance is for the market to change direction. There are so called ‘All-Time Extremes’ when the given group of traders have never stood at that level before. These are relatively rare situations, but they do happen from time to time.

It the following example, which is for Soybeans, I’ll show you how the Commercials Extremes can help you find turning points in the market. The red lines are indicating points in time, when the COT picture showed an opportunity to short the market, while the green ones are indicating good buy opportunities.

The example I’m showing you now is from late April, this year, when there was an All-Times COT Extreme picture -> Commercials were at All-Time short levels, while Large Speculators were never so optimistic about the market. In this case, Small Speculators were more or less neutral in the sense that they were not at an extreme level.

Soybeans.png585×602 193 KB

1 Like
3

EXTREME COT CHANGES
The title sounds similar to the previous, the difference here is that we are looking at sudden large changes in the positions held by the main participants of the markets (C-LS-SS).

To give you a great example, let me show you an example from 2010 on the oats market. Actually here I can show you a Buy and a Sell signal from Commercials close to each other in time. If you look carefully, you could see that the two circled changes are much greater than the surrounding changes that can be considered average size changes. Obviously the green circle is indicating a Buy, the red circle a Sell signal.

Before I had to check each and every market week-by-week and search for these large movements… these days I rely on programs that do it for me. If you would like an easy solution, use a service that can show you these signals. The one I’m using now does it by taking the current change and compares it to a pre-defined range. The good thing about it, is that I have the option of defining the range myself, example: for one year range, all-time range or even 43 weeks range (!) if that’s my desire.

Let me show this on the 27th report on RBOB Gasoline:
The system is showing me the changes on a 52 week (1 year) time period. It shows that Commercials have changed their net short level and went even more short. This change was 10%. What does it mean? Well I’ve drawn the 100% with purple and the chart is set to show the past 1 year. I’ve indicated (with red) the 10% change, which is measured to this 100% total range. It’s that simple. Now obviously if you’re using such a system, all you need to do is let the system search automatically for the largest changes that happened and then you only need to analyze those and see whether there is an opportunity to get in the market or not.

Oats COT extreme change.png514×602 101 KB

RBOB Gasoline.png581×602 160 KB

4

COT Index
In the following example I would like to explain to you another great COT analysis tool, the COT Index. It is also a measuring “device” for extreme pictures in the Commitments of Traders report, but here the Index shows us in percentage – compared to a specific time period – how far we are from the range.

In the following example (on Corn), I’m showing you what the 95% COT Index in Small Speculators means. I set the chart to show a three year period and I set the COT Index to for the same period. I drew the 0% and 100% lines so it’s easier to see what this 95% means.

If you look carefully, when Small Speculators were close to 100%, prices declined shortly afterwards. When Small Speculators were closer to 0%, prices soon started to increase.

Corn_SS_COT Index.jpg685×700 55.2 KB


5

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.

AUD.png602×563 169 KB

6

Commercial Capitulation

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.

Cotton.jpg652×700 52.4 KB

7

We have come to the point where I have mentioned all the COT analysis tools that I use, so I would like to sum it up now in a few words:

[B]1) COT Change:[/B] It compares the level of the change in COT data to a predefined range of the data and shows this change in percentage compared to this range. Large changes can sometimes be great signals as shown in my previous example (Oats).

[B]2) COT Extreme: [/B]It shows how many reports ago stood the given COT data at the current level. In case of All Time signals, it means that the given COT data has never in the past stood at that level, these signals are relatively rare and thus are extra strong signals.

[B]3) COT Index:[/B] A classic analysis technique of COT data. By establishing a lookback period, it is possible to “normalize” COT data on a 0-100 scale. A 100 reading shows that during the lookback period, the current reading is the maximum; a 0 reading show that it is at a minimum.

[B]4) Long-term trend[/B]: I’m interested where the Large Speculators are headed. During a trend it is good to follow them, but of course at COT extreme levels, usually it is the Commercials who are on the right side of the market!

Next week I would like to continue this topic with more recent examples. I am a follower of a so called „weekly COT review” on YouTube, and there they pick some markets where either the COT change was large or there was a COT extreme situation. I will try to give you a more detailed explanation about the markets that they analyze.

I hope you are enjoying this topic and if you are new to this Commitments of Traders report, I hope I could give you enough information to know better how it can be used for trading.

I welcome every new opinion or any other COT analysis tools that one might know of!

If you have any questions, feel free to ask, I promise that I’ll try answering them! :slight_smile:

All the best,
Dunstan

8

Nice thread the only thing I dont like about the COT charts you posted is it does not show open interest

9

You are absolutely right! I have contacted the site and got the answer it will be available soon.

10

Are you trying to promote the site where the COT charts come from because you’ve posted this thread on a few other forex sites?

11

I’ll follow along with interest. The only problem I have ever had with interpretting the COT is that commercials and large speculators almost always have a near perfect, inverse relationship. It stands to reason, one side is buying from the other so they must, of course, be inverse to each other. Small speculators tend to be reactionary, all over the map and, therefore, useless.

If you can demonstrate how to peg the future movements of the commercials (which will, by default, reveal what the large speculators are doing) then I look forward to adding a new weapon in the arsenal.

12

Nope, not really… I’m just enjoying teaching others this tool and the positive feedbacks! :slight_smile: It is true that I use a specific service and abviously I use there charts for my illustrations, but my intention is not to promote them.

I hope that here I will receive a larger attention and will receive good questions or maybe even learn from other traders who have been using this tool. For example I would very much appreciate if someone, who has experience using the newer COT report types, such as the Disaggregated report, would join the thread.

All the best,
Dunstan

13

I’m very happy that you decided to join, looking forward to you comments!
The truth is that Commercials and Large Speculators are not in perfect inverse relationship… There are many markets, where Small Speculators signal are very effective, I’ll show you some great examples soon!

All the best,
Dunstan

14

That’s good to know. So if you have been using the COT for 5 years, as well as posting commentary, why don’t you post your last trade, why you took it, how you used the COT and also your next trade. There is plenty of COT commentary around the web from “experts” with 20 years experience …

16

Hi mrchilled,

I hope this will be one of the last posts on personal issues, why I wish to share my knowledge etc… and we shall continue with discussions about the report and look at some interesting markets to analyze together. Yes, there might be traders with more experience and who know much more than I do. As I have said it earlier, besides teaching others the things I know about the report, I’m also open to learning… for example it would be nice to hear from someone, who has moved on from the classical cot report (the so called legacy report) on to the newer reports that CFTC publishes (CIT, TIFF & Disaggregated cot reports).

You have recommended me to reveal my trades and talk about the system I use…

In this 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.

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 you should have a solid system for your trading, a system that can help you enter and exit trades.

What I do believe is this: Using COT analysis integrated in your tested system can filter out some bad trades or it may focus your attention to trading opportunities that your 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 deffinitely get you from A to B.

Kind regards,
Dunstan

17

Good luck with the thread, I’m out. For all I know, you don’t trade or are unsuccessful so your commentary or COT analysis is mis leading. All the successful threads and the ones that stay alive are from people who show their trades or strategy or examples. Also, open interest is the probably the most important component of the report, so you should really include it.

18

Ok, interesting reasoning you’ve got there… can’t say that I agree with you -->

The fact that I am or I am not a successful trader should not determine whether the tools I am showing to you are valuable tools or not. Let’s say I am an unsuccessful trader… what if I am using the tools in an ineffective way? People reading these posts could still profit from them. Anyone sticking to this thread will see.
Remark: Overall I’ve been trading for 12 year (last 5 years I’ve started using COT analysis). The past 5 years average return was 34%. It hasn’t been a year since I have invested the majority of my account into a regular business (real estate), so these days I am concentrating on that, but I do look at the markets and trade regularly.

Why do you think I don’t look at open interest? I have never said I don’t. It is true that the website that I use for COT analysis does not chart it – which is bad – but they do give a Volume&Open interest analysis. I use Metastock for chart analysis and I use conventional TA tools also.

Please try to understand, that this thread is not a system introduction, purely a topic on the commitments of traders report and analysis on it. Nothing more, nothing less.

Good bye,
Dunstan

19

Interesting thread. I think in the interests of everyone (including you since you are not promoting that service), it would be useful to give a list of free COT resources so nobody is compelled to pay for free information unless they want too. I’ll list a few and you guys can add more:

  1. Barchart.com - one of my favorites.
  2. timingcharts.com
  3. CFTC’s Commitments of Traders | OANDA fxTrade Canada - this one doesn’t show commercials though.
  4. Now and the Future
  5. CoT Charts :: Dukascopy Bank SA | Swiss Forex Bank | ECN Broker | Managed accounts | Swiss FX trading platform
  6. …
20

That was a very good idea, I appreciate your help here, thanks a lot! I’m glad that you are interested in this thread, I hope I can give you some usefull information.

Stay tuned,
All the best,
Dunstan

21

Hello there :slight_smile:

My name is Sam, I live in belgium and new to Forex.

I’ve been browsing these forums for a while, decided to learn forex the beginning of this year.
I’m currently still studying more than trading. I want to understand as much theory beforehand,
Then I will start trading my demo account more often. Trying to study and understand price action and market structure,
I stumbled upon COT data as a reference of Market Sentiment.

Been reading and watching alot of videos, I’m certain this will help me alot, and it got my wide attention.
Thank you for this topic, I’m sorry to not contribute, since this is all a new concept to me Ill try understanding first. :slight_smile:

Sam