COT Report Analysis - a thread on market sentiment - Page 2
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  1. #11
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    When I write this post the new COT report is about to come out! Before I take a look at it and decide what to do next week, I make a short review of this last week.

    As I said I entered CAD/CHF long, Entry: 0.8245. At the moment this trade is at exactly 0 pips. It looked very good actually until Friday afternoon when bad CAD news came out. CAD lost 62 pips in the following hours against CHF. I think it is a sing that CAD is strong that, despite the bad news 18 pips are gained back and although Fundamentals were not on the side of my pair, it is still breakeven. What would happen if the news were on my side?

    I also look at the two "theoretical trades" which I did not take, only mentioned:

    NZD/CAD short: +84 pips (short at 0.9284)
    GBP/USD short: +63 pips (short at 0.6831)

    Hmmm both of the other trades would have been a better idea it looks like...

    Probably tomorrow I will look at the new Report and summarize what I found! Have a nice weekend

  2. #12
    Quote Originally Posted by ForExchange View Post
    When I write this post the new COT report is about to come out! Before I take a look at it and decide what to do next week, I make a short review of this last week.

    As I said I entered CAD/CHF long, Entry: 0.8245. At the moment this trade is at exactly 0 pips. It looked very good actually until Friday afternoon when bad CAD news came out. CAD lost 62 pips in the following hours against CHF. I think it is a sing that CAD is strong that, despite the bad news 18 pips are gained back and although Fundamentals were not on the side of my pair, it is still breakeven. What would happen if the news were on my side?

    I also look at the two "theoretical trades" which I did not take, only mentioned:

    NZD/CAD short: +84 pips (short at 0.9284)
    GBP/USD short: +63 pips (short at 0.6831)

    Hmmm both of the other trades would have been a better idea it looks like...

    Probably tomorrow I will look at the new Report and summarize what I found! Have a nice weekend
    So, what is your thought process / logic behind placing "theoretical trades"?
    If one of these work out in your favor, how does that impact you psychologically? (And, vice versa- if one doesn't work out in your favor.)

    If you get a signal based on your trading plan, 10 out of 10 times you need to be in the market. Through position sizing you can adjust your confidence in the signal.

  3. #13
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    Hi Forexunlimited,

    there are many questionsmarks at this point. I find COT very powerful that is why I trade. I basically try to find the right time length for a trade and trade size. However with the trade size I really have to practice because it depends greatly on the stop loss I use. I guess I need a bit larger stop losses.

    I make my analysis based on COT and only enter the trade if it goes along with my Fundamental bias. For this reason I did not enter the other two trades. I was not sure the NZD and GBP can lose suddenly as much as they just lost.

    Of course if the trades do not go in my direction I have to look after what were the reasons, but I have to rather look the long-term trade potentials I guess than short-term.

    And the main strategy that is behind all this and I believe in: "The trend is your friend."

    Thanks a lot on your feedback in all the threads. In the US Fundamental thread I am still waiting for your answer :-)

    I am also interested what you think about the COT report itself and if you use it.

  4. #14
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    First of all: as Dstan said, I made a mistake in my second post of this thread! I cannot correct it anymore. Be aware please even if I do not always write, the percentages refer always to the percentage of the Non-commercial speculator segment as I mostly make my decisions based on their action.

    So a bit earlier I evaluated the performance of the last week (two trades are doing great, one break even but actually is also ok because of positive rollover).

    I looked at the COT report which was shortly published a couple of hours before and I make decisions based on the CURRENT Cot report. As I said earlier I try to update my trades always based on the current and newest Cot report (comes out always on Fridays).

    CAD/CHF long: I do believe that this trade is going to play out good. I have of course a stop loss as in all the trades but the actual Cot report suggests for me to stay in the trade. CAD looks strong, CHF does not so the setup is still valid. More than that, even the negative Fundamentals for CAD could not give a gain for CHF so I believe in the strength of CAD.

    NZD/CAD short: well, I will enter this setup. Until now it was theory but I also believe in this one. NZD fights to stay bullish, but the numbers tell me they lost the steam. Of course I might be wrong however a huge proportion of non-commercial traders are long and there are not too many left to buy!

    GBP/USD short: this trade was a theory only, though a winning theory! It will however do not come into practice as GBP does not give me a clear signal what to do. If I was in a trade, I would liquidate now. So I just better stay away from this pair. In the long term I am still bearish, but I do not enter it without the signal!

    These above mentioned trades have one disadvantage. If you like to diversify your trading you should not enter both of the trades I guess because CAD is involved in both of them which increases your risk if it goes the wrong direction. A possible solution might be as ForexUnlimited wrote to trade with smaller position sizes and it is then effective for risk control.

    Tomorrow I will go more into detail for every single currency what the numbers tell and what is the theory behind. However it is quite late and I just wanted to update the three trades based on the new report.

    So stay tuned and tomorrow/or on Sunday the new ideas are coming for the next week!
    Last edited by ForExchange; 05-30-2014 at 06:11 PM.

  5. #15
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    Now lets see what I found in the new COT report and which setups do I like for the upcoming week.

    First of all I look at the currencies and then comes what I think about it! Important: the following percentile facts are based on the Non-Commercial sector of the COT report!

    AUD: based on COT report there is no signal. All three segments are divided around 50% for longs and shorts. No clear trend.

    GBP: now the GBP is very intersting. GBP was very bullish in the last year and it gained against the countercurrencies. Last week I though it "finally" started to go down and I also had a profitable trade idea. This weeks' report however shows again increasing long % of traders (64.51%) but it is not an extreme so I will not trade it.

    CAD: still the best long signal in my opinion. The COT report shows me it is not a bad idea to stay on the long side. Based on the report, long positions are 37% only and the CAD was reacting to the fundamentals strong during the past week. CAD has a long potential to grow!

    EUR: obviously EUR lost a lot of its long positions in the last for weeks (from 58.63% down to 44.74%). The currency was a rollercoaster last week, although my bias is still short, there will be better opportunities to choose.

    JPY: the Yen still looks very bearish (81.73% of non-commercial positions were short) and the currency value changes rapidly based on risk sentiment. These conflicts around the world do not make it easy to trade this currency currently. It is not yet on an extreme level however where I would go long with it. It is also important to keep in mind that the effects of tax rate high came out this past week with very weak fundamental news. Against such a storm of long positions I do not want to go.

    CHF: the most interesting currency in this weeks’ report! There was a huge sentiment change between the positions! A week before 58.43% of non-commercial speculators were long, this week this proportion is only 42.82%! If you read my post from last week, you know I am in a trade against the Franc, but I have to watch out for the technical analysis to decide when to get out.


    USD Index: well it is not listed in the COT report but “stole” the USD Index figure from cotbase.com. It is quite neutral, neither sell or buy signal.

    NZD: if you read my last posts, you know that I am short on this currency. It has still some strength but I think it has to come to an end soon. The positive news and carrytrade keeps life in NZD but the big rally is over. 84.34% of non-commercial speculators are already long, there is not much possibility to go higher.

    MXN: now you might ask “What the hell is the Mexican Peso doing in this analysis?”. I know exotic currencies are not in the headlines often but it is in the Cot report and actually I take a quick look always on MXN, BRL and on RUB. This time I thought MXN has deserved to be in the report as I see a potential in it! Although 84.61% of non-commercials are already long but there is a continuously growing open interest out there (157 626) which is a signal that there will be an action, possibly still MXN buying interest is out there. The figure from cotbase.com shows the pair is not an extreme level yet and MXN long positions are growing actually steadily. It might still be a good opportunity to go long on MXN, however with a tighter stop loss! The open interest can also mean a big downward movement is coming.

    Conclusion:

    Now we take a look at the summary! I do not find so many signals to trade as last week so I will stick to 3 trading opportunities:

    NZD/CAD: short
    CAD/CHF: long
    USD/MXN: short

    Probably your realized that two ideas come from last week. I am already involved with CAD/CHF and will enter NZD/CAD. The disadvantage of these trades are that they both involve the CAD which is not a great diversification.

    The USD/MXN short idea is the only new idea and I have to keep watching this pair a bit before entering the trade. I never traded MXN so I would like to gain a bit experience and observe it. My bias is long for MXN with a tight stop loss and I can expect in some weeks maybe a bias change so I will be ready to change direction and go short with MXN. It is not easy to trade for me though since I have no Fundamental news on it like on other currencies and have to stick to the Technical analysis and COT report which makes it a bit more difficult. Anyway even if later on I will jump in, I do not expect such a long position possibilities like on the CAD pairs.

    What do you think about these ideas? Do you make trades based on the COT report?
    Last edited by ForExchange; 05-31-2014 at 04:35 PM.

  6. #16
    Regarding your USD/MXN short:
    I like this for the most part. Just be aware:

    1) If you plan on holding for longer than a week, NFP is on Friday.
    2) The Peso has shown some some good strength off the 2/2014 highs- sellers have been pretty much in control for 3 months. On top of this, a supportive trendline was broken, retested and held as resistance heading into the close of April. Although there is some current support at the level the pair closed @ on Friday, I don't think this level is going to hold.

    Just looking @ price action from the swing high on the D1 on 4/28 forward: Sellers have been in control 60% of the time. The closes on the bearish candles have been @ / near the lows of the day. The closes on the bullish candles are primarily printed well off the highs of any intraday rally and attempt to bring prices higher.

    Furthermore, a major red flag to me is how embedded the 14,3,3 STOCHASTICS indicator is- 17 days in oversold territory. This is a contrarian signal, i.e. potential further weakness ahead. Although there is some bullish momentum divergence on the H4, look how many times the indicator and price has diverged, yet continued to sell off.

    Think about it- a major trendline (also a channel floor) which held for literally over a year was just recently broken to the downside, retested and held as new resistance. This is a significant event.

    I guess it depends on your timeframe, and how long you plan to stay in the trade. If it's longer term- pull up a weekly...There were 4 consecutive W1 PinBars printed. From the 1/2014 highs, sellers have been in control nearly 70% of the time. What does this communicate about the imbalance in the market between supply and demand (i.e. sellers and buyers)? 12.85 is clearly a very important price point for this pair. Given the current read on price action, I'd say that personally I'm neutral / bearish. But, that's just my opinion.

  7. #17
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    Hi Forexunlimited!

    Thanks for your comment! As I said I have never trade this pair, that is why I am looking at it now, however when I get a signal later, then I might get into it.

    Looking at your analysis my bias is more bearish at the moment :-) I like a lot the trend line break and the channel. Also the candlesticks show the bearish bias.

    And about the indicators and oscillators... Hmmm in the very beginning I took a look at them always until I read more and more books and had bad experience with them. Actually many of the great traders do not look at them at all and I also do not like them. Looking at historical data they look great but when you need it for a trade it is very often not useful. Especially Stochastic is also very used on this side but it does not show a valid sign however I am concerned about a trade I will definitely enter with or without the stochastic. Just like you say, price and indicator diverges so I better do not follow it.

    It is also interesting that you mention NFP. Very true, on a weekly basis it has an effect on the outcome. However the price will rertrace after a while to the level where "it should be" so on long-term I do not think it has a serious effect. But as you said, if the trade is on for 1 week then it is crucial to end it Friday morning, because in the afternoon the result can be very different from the morning standing.

    We will see how the pair moves and the end of next week we will be smarter!

  8. #18
    Quote Originally Posted by ForExchange View Post
    Hi Forexunlimited!...And about the indicators and oscillators... Hmmm in the very beginning I took a look at them always until I read more and more books and had bad experience with them. Actually many of the great traders do not look at them at all and I also do not like them. Looking at historical data they look great but when you need it for a trade it is very often not useful. Especially Stochastic is also very used on this side but it does not show a valid sign however I am concerned about a trade I will definitely enter with or without the stochastic. Just like you say, price and indicator diverges so I better do not follow it.
    What was your "bad experience" if you don't mind me asking please?
    Indicators don't work for everyone, and it's important to trade in a manner which is most natural to who you are as an individual.

    Regarding the underlined statement above...What's the difference between looking back @ historical price action (i.e. candlesticks) and utilizing mathematics to arrive @ a numerical representation of momentum (by looking back @ candlestick closes)? The Stochastics indy is a great tool (just a tool, not ever the primary reason to make a trade) to aide in interpreting where price is presently trading and how much momentum is behind a move in relation to a chosen range of x Weeks, Days, Hours, etc.

    When the STOCH diverges from price, that could be an incredibly powerful symbol, and is one of my main strategies actually. So, I don't agree with what you're saying in regards to "price and indicator diverges so I better do not follow it". You'd want to "follow it" 8 or 9 times out of 10, because it's a great signal to enter the market in the right environment. Right now is just not the right environment because of the daily chart being pinned down. Sellers are just eating up buy orders.

    Quote Originally Posted by ForExchange View Post
    It is also interesting that you mention NFP. Very true, on a weekly basis it has an effect on the outcome. However the price will rertrace after a while to the level where "it should be" so on long-term I do not think it has a serious effect. But as you said, if the trade is on for 1 week then it is crucial to end it Friday morning, because in the afternoon the result can be very different from the morning standing.
    Not sure how much NFP has an effect on a weekly basis (unless you're mentioning the weekly chart?) The print only comes out once a month in case you weren't aware of that. No worries though. Be careful making that assumption that "price will retrace after a while" because that is not completely accurate. Check out the image below- it's a chart I made a few months back, showing how NFP impacted the USDJPY. Any number in Green is a better than expected release- any number in Red is a worse than expected release. Bottom line, my study shows that it's not as easy as simply buying and holding the Dollar when NFP is good, and selling it when NFP is bad.

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    Link to image

  9. #19
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    Hi Forexunlimited,

    Candlestick vs. Indicator: a candlestick can tell you a lot more than price action because you see basically the movement the the price during the time interval besides only taking into consideration of the closing and opening values. I think this is a very important information. About my experience: Stochastic and RSI are similar and often used everywhere. For a period of time a looked at both of them until a certain point when I realized they give often just the opposite signal! If one shows buy while the other shows sell then there has to be something wrong. But as you say it, if you can effectivel use it then great!

    I think however that Stochastic can be useful in the USD/MXN trade for example as the pair is in the middle of the channel and if Stoc is right, it would make sense until price moves a bit higher and sell at the top of the channel.

    Your table about NFP is great, good analysis. Yes it shows that reaction varies quite a lot. If I can suggest something: to measure the reactions better, I think it would make sense to plot these data on a clearly trending chart where the trend goes one direction and we can see the effects a bit better if the trend retraces or not. USD/JPY had huge swings which makes it more difficult to decide what is the effect of NFP and what is not. USD/CAD is also not perfect on the Daily chart but I think is still better to see the effect.

    If you answer for this post, please do it on US Fundamental , it would be great. The thing is I would like to concentrate here on COT issues, the other post is basically "dead", we can discuss there all other issues!

  10. #20
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    Quote Originally Posted by ForExchange View Post
    Hi Dstan,

    thanks for the detailed answer. Well if you look at the CFTC Commitments of Traders Short Report - Petroleum (Futures Only) short version, then you will see the "three types of crude oil" I mentioned. But I will follow then the one with the most volume, like you suggested.

    Are you trading currencies or commodities? Do you pay for cotbase.com? Definitely I do not want to pay in the beginning of the learning process. I checked your thread, worked me through the first 20 posts and got already some ideas for other sources.

    You are right, I did not explain the 63% right, I meant above to say 63% of the Non-Commercial speculators were short. But it is a great point from you to outline, because I guess other readers might have not understood it as well. So I have to then always write I am talking about the Non-commercial speculators when I make my decisions. However there is a question about net positions: although a contract has always a short and a long side, how can it be that net positions are positive or negative? Dont they have to be balanced?

    I am waiting for the report today to come out! Have a nice afternoon

    Hi ForExchange,

    Hi ForExchange,
    Sorry for my late answer, but I’m usually out for the weekend
    As I see you are look at the disaggregated cot report. Since it does not have such a long history (+ the too many categories messes you up a bit), I’d recommend that you analyze the classical cot report (some people may call it the legacy report). You can have a look at it here: CFTC Commitments of Traders Report - NYME (Futures Only)

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    Here I can explain, why the net values are negative or positive but at the same time if you add up all, you get 0. Just concentrate on the colored boxes. I used the colors the same as on the GBP chart I posted earlier --> Green: They are the non-commercials, but most people, who view the cot report regularly, simply call them: LARGE SPECULATORS (LS). Red: COMMERCIALS (C). Blue: Non-reportables, they are SMALL SPECULATORS (SS). The difference between LS and SS is the size with which they trade. Above a specific level, you need to report towards CFTC. Since these are pretty high levels, we can guess that these Traders are actually really LARGE players in the markets (like hedge funds…). SMALL speculators do not reach these levels, they are generally individual investors (like you and me).

    If you calculate the net positions for these players, this is what you get:
    LS: 507592-97384= they are long 410208 contracts.
    C: 491241-920424= they are short 429183 contracts.
    SS: 99092-80117= they are long 18975 contracts.
    Adding these up (410208-429183+18975) you get 0.

    I trade both, commodities AND currencies. I also trade OPTIONS on futures!! Yes, options. I think they are great instruments for long term trading. If you think about it, a cot extreme may exist for many weeks before prices react to the signal. Instead of taking large risks by using wide stops, it could be a solution to enter an option trade. There are two ways that may work (and now I am not go’na go into complicated options strategies – cause there are a few just two simple cases) 1) Buying: let’s say there is a huge, close to all time or maybe even all time cot extreme in a market, a bullish one. You know that prices will eventually bottom, but who knows, the decline may go on for a couple more weeks. In this case you can buy a CALL option with a strike price that you consider: it can be reached by price in a certain time (certain time: should be the expiry date of your option), I’d say 2-3 months to be sure. If prices do bottom out in let’s say 3 weeks , but then the rally erupts and you see prices rocketing towards your strike, during the 2-3 months of your option’s life time, prices may even go much further! Your Risk is fixed (the price you payed for the option) and your profit (in case you wait for the option to expire) is the intrinsic value (Spot price – Strike price) of your option. 2) Selling options: This is a riskier strategy, since theoretically you are taking unlimited risk… well there are hedging possibilities and of course you can use stops here as well, but I agree, you need to be more careful with selling options… Anyhow, just so you see the this strategy: to stick to our example… having this huge cot extreme in the market, you are pretty sure that prices will not go any deeper from where they are standing. You can start selling (I would say – because of the risk issue – OTM (out of the money)) PUTS, probably ones that will expire soon (a few weeks), but there could be option traders reading this who would argue that it is better to sell options with more time value… Your question may be: Ok, but what’s my reward: If prices start rallying as you predicted, your option will lose it’s value very fast. Since you sold the option, that’s good for you!
    I’m not saying that option trading IS the only way, but it is definitely an alternative that I think you should consider one day.

    Yes, I am a subscriber, but it has a free part, where all cot charts can be seen yearly charts). I wouldn’t say it is costly service at all… if you think about it’s about two commission a month!! If you do trade regularly (and especially if you are a daytrader!!) Absolutely worth it!

    All the best,
    Dunstan

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