COT Report Analysis - a thread on market sentiment
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  1. #1
    Join Date
    Nov 2013

    Default COT Report Analysis - a thread on market sentiment

    In this thread I will post and discuss with you trading systems and ideas based on market sentiment. Although market sentiment is key in the forex market, we basically never read about it when making a trading decision or reading the analysis of someone else (in case you never heard about market sentiment, you can start your journey here in the School of Pipsology: What is Market Sentiment | Market Sentiment | Freshman Year | Undergraduate ). Also, before starting this thread you should gain the basic knowledge on COT here: Basic COT knowledge - School

    For this reason I would like to start an open discussion, from which we could all benefit and help each other along our journey of becoming a better trader.

    It is of course important to have the right fundamental and technical setup for market sentiment and I try to get all three of them together when making a trade.

    I will use the COT report (Commitments of Traders - CFTC) for analysing market sentiment. If you have any other tools in your arsenal, don't be shy, post it in the thread! Keep it in mind though that the main discussion is about the COT report and this thread is not opened to make long discussions about technical analysis and systems.

    Now, as the thread is quite long, I give you a table of content to help you choosing the most important posts of the thread and catch up with the needed knowledge on the COT report. The thread has many important material, so reading it from beginning until the end is the best for you, but in case that is too much time, then you the table of content to choose the topics you want to cover.

    Here is the table of content for the thread, with some explanation behind the links (I am continuously working on it so it is regularly updated these weeks):

    Where to start:
    An introduction to see an expert traders' COT indicators watch list on a weekly basis - for further knowledge on how BB uses his indicators please check posts 1484, 1485 and 1492. - Original post still to optimize

    Understanding Open Interest (OI)

    Set up instructions for your own COT Index indicator on in 5 minutes - further posts about getting entry signals: 901 and 910 - Original post still to optimize

    Make your very own COT historical database so you can start analysing the market - The link guides you to the first part of the tutorial, for the further steps you have to visit the following posts: 1707, 1708, 1712, 1719, 1720, 1726, 1736, 1737

    If you have already set up your database, here are the steps how you can efficiently and fast update it on a weekly basis - The link guides you to the first part of the database update tutorial, for the further steps you have to visit the following posts: 2009 and 2010

    Introducing ProGo and Williams' VIX Fix - check out the following post (1919) to see the indicators in action

    COT in practice with many examples:
    An example on silver about the usage of Willco and COT Index in practice - For the second part of the analysis check post 1755

    A study on silver: OI and Price - For the second part of the analysis check post 1572

    Using the COT Index for possible trade ideas - Original post still to optimize

    More examples to understand how to use COT data - To read further examples about how the indicators work in practice here are the commodities and post numbers where you can find the analysis: Copper: 1532, Platinum: 1542, Palladium: 1545, Gasoline: 1549, Natural gas: 1580, Crude oil: 1674 and VIX: 1687

    COT literature:
    Some introductionary thoughts on the Williams and Briese books - For the second writing check post 141

    Book review: Trade Stocks & Commodities ith the Insiders, by Larry Williams - this link starts the description of one of the most know COT books by Larry Williams. The link navigates you to the first post discussing the book. Here are the further post numbers to visit and read about the other parts of the book: 545, 561, 615, 659, 707, 754, 834 and 880.

    Book review: The Commitments of Traders Bible, by Stephen Briese - the link navigates you to the first post discussing the book. Here are the further post numbers to visit and read about the other parts of the book: 219, 228, 240, 252, 262, 275, 291, 338, 363, 416 and 431.

    I wish us a great learning curve with market sentiment and awesome trades based on it!
    Last edited by ForExchange; 11-13-2014 at 05:13 PM.

  2. #2
    Join Date
    Nov 2013
    My first trade was made yesterday based on market sentiment. I entered short on the NZD/JPY pair. Here are the reasons why:

    1. As I said I will emphasize the importance of the COT report (as I do not know any other valuable sentiment measurement tools). I checked the data which came out last Friday (2014.05.20). This data contains the net long and short positions for the different currencies.

    I searched for currencies where I can find an imbalance in market sentiment. I found out that 17.53% of the speculators were long on the JPY and the rest of the 82.47% were short. I came to a similar concusion with the NZD however to the opposite direction: 15.79% of the people were short and the remaining 84.21% was long. Now both of these currencies ring me the bell and the questions came automatically: if everyone is short on JPY already, then who is going to be still selling the currency? And at the same time: if everyone is bullish with NZD then who can push the price higher up?

    I decided to check the fundamental factors but the NZD/JPY short setup started to line up.

    2. Fundamentals

    Although the tax rate increase made many traders bullish on JPY the recent economic data (higher than expected GBP and inflation) and risk aversion (tensions in Russia-Ukraine and Lybia) resulted in supporting the JPY. On the other side NZD was/is bullish for a longer period of time because of the rate hike (3.0%), but the currency is getting too strong and the economy does not provide great data recently. The only one reason against being short on this pair is the great carry-trade opportunities for NZD longs (3.0% kiwi vs. the yens' 0.0%).

    After seeing all these factors I entered a very small position to see how it works in practice. I went short on NZD/JPY on market price: 87.54. At the moment, the trade is doing fine, I have made 66 pips so far. I moved my 50 pips stopp loss 4 pips under my entry price so I will definitely not go negative with this trade.

    As I still figure out how to trade market sentiment I have a bit problem with my exit point. I do not want to get out only because of a negative economic report or weekend risk. I definitely want to wait until late Friday and check out the new COT report to see what it indicates. Then I will have a view what the new informations tell about the current net long and short positions and make my decision if I stay in the trade or not. As I already locked in a minimal profit, I cannot risk much and at the same time I can test the strategy.

    If you have improvement ideas or are in trades because of the sentiment analysis, I am waiting for your feedback and suggestions.

  3. #3
    Join Date
    Nov 2013
    I started the thread yesterday and today Espipionage analysed the COT Report from last week: CFTC Commitments of Traders Forex Positioning Update | Forex Blog: Espipionage It is a great article to see a summary of the report, I highly recommend it to get a feeling how to interpret the most important data. I would also advice for you to look the data out from the COT report on the website because if you find these numbers on your own then you will be able to do the analysis on yourself next week!

  4. #4
    Join Date
    Nov 2013
    My first trade is closed so here are the facts and a bit of analysis:

    Currency: NZD/JPY short. Entry: 87.54 Exit: 87.05 Result: +49 pips

    Winning is always good, more winning is even better :-) The pair was down all the way to 86.37 when suddenly it changed the direction. It is hard to say what was the catalyst, there were no news event for the corresponding economies. The change came mostly in the European session when actually people in Japan and New Zealend are sleeping... Anyway probably just risk-appetite was on which is not great for the JPY and the pair went against me.

    It is good that I adjusted my stop loss to 87.05 to lock in some profits when the pair reached 86.55. It might go to trade this pair again short when I see the right signal for it but it has nothing to do with the original sentiment trade idea so I will also not post it here.

    The first trade was successful and I am looking forward to make another one based on sentiment analysis soon.

  5. #5
    Join Date
    Nov 2013
    As the new COT report came out a couple of hours ago I can start analysing the situation, look what net positions were the big changes last week and check if they match up with my fundamental bias. As the strategy is designed and I still test it, I definitely will enter into a trade on Monday and hopefully will end up like this week!

    So what has changed in the COT report and which currencies are looking good to trade based on market sentiment? The following percentages refer to the Non-commercial speculators, which segment I find the most important to make my decisions.

    CAD: although the currency is more balanced than before, still only 37.09% of traders are long on the currency and it closed a pretty good week. The positive week for CAD is interesting for me because most of the major CAD news came out negativ, still the currency managed to gain pips against most other currencies. Sentiment and Fundamentals make me being bullish on CAD and a candidate to go long with next week.

    GBP: speculators are still bullish on the GBP, but we will see how long this remains. Last week 35.64% were short on GBP, this week 36.96%. It is not a great difference, but there is still some chance in my opion to push prices higher. Even if GBP does not look too bullish for me, it is prints positive data so the Fundamentals a slightly bullish for me. In this case market sentiment shows to go short, but I will not do that and live this currency out of my trade.

    JPY: now the Yen is the winner of risk aversion and as I mentioned in my last trade almost all people were bearish on it, only having 17.53% of speculators long on JPY last week. This ratio changed now, but it looks still very bearish with 20.49% net long positions on the JPY. The Fundamental news were more bullish than expected so this currency can be a candidate as well to go long! My only problem is with JPY that it is very dependant on risk aversion and the situation of risk appetite changes every day, making me more difficult to analyse what is coming next week.

    EUR, AUD and CHF: the results are quite mixed, giving no clear way to trade, I will do not choose them. The EUR is extremely balanced and there are the elections on the weekend which might have a larger effect on the currency, so it is another reason to leave it alone for the sentiment analysis based on the COT report.

    USD: I checked the major pairs, USD is slightly bullish but not in every market. Other currencies are measured vs. USD so unfortunately I do not have a ratio on that one. However Fundamentals are showing a mixed picture so I will not trade this currency.

    NZD: there was not much change since last week, the bullish bias is still on the side of the Kiwi. 15.79% traders were short on NZD last week, this week this number increased to 17.86% which is still very bullish. The Kiwi was very bullish last year and gained a lot against the other major currencies. Is it time for a reversal? Well carry trade is still on the side of NZD and makes it very attractive, still the currency is not gaining vs the other majors in the last months/weeks so it does not seem to be a big mistake to go long with it in the right spot.

    Summary: based on the sentiment report I "have to" go short with NZD again. Now many of you would find this a suicide based on the last year's NZD action, but I test this system and have to see how it performs. The sentiment says me short, so I go short.

    For going on I have an option. I can choose the JPY again like last week, or we will see another setting with the CAD. Checking the daily charts, going long on NZD/JPY and on NZD/CAD both look good. Always remember: "Trend is your friend." I have for some reason a good feeling for CAD, so next week I choose CAD to go long with.

    Lets make a conclusion: on Monday, 26.05.2014. I will enter a short position on NZD/CAD. As this thread is to learn and optimize the system, I do not really suggest to trade this setup.

    However you are very welcome to share your ideas and to discuss it with me. We might find a better setup to enter another trade instead of that on Monday.

    Have a nice weekend!
    Last edited by ForExchange; 05-30-2014 at 05:45 PM.

  6. #6
    Join Date
    Nov 2013
    I thought I give now an update how the trade is going. At the end I had to change my setup, I checked the charts and NZD did not give such a clear technical signal as CHF, so I entered CAD/CHF insted of NZD/CAD:

    Currency: CAD/CHF long, Entry: 0.8245, Current result: +21 pips.

    There was no main catalyst for CAD and CHF and slowly but steady it is going in my direction! We will see if there comes a story changing news or what the new COT report says.

    I made a stupid mistake though. On Sunday night I thought I enter the market because Monday early I might not be at the computer and the pair can already go in my direction. First mistake was that I did not take into account that Monday is a national holiday in UK and US so there is no volatility. And even if I enter the market on Sunday I should have waited 1 hour more. I paid 10 pips spread instead of 4 pips... Well that is a 6 pips present for my broker. The upside is that there is a rollover in my favor which is always nice to have! So if I stay long in the trade it gives me some extra money.

    I thought I give you also the current results what would have happened if I entered the two other interesting trades on Sunday night:

    NZD/CAD short: +61 pips (short at 0.9284)
    GBP/USD short: +67 pips (short at 0.6831)

    The GBP/USD short I analysed on the weekend and is not in the above analysis. It seems to me though a very interesting pair. People are bullish on GBP and many are neutral (rather say slightly bearish or slightly bullish on USD), but as far I see the 1.6950 might be a major resistance and based on my analysis I am skeptical on the bulls power. The fundamentals do not yet confirm my story of going short on this pair but I see that in possibility in the cards.

    It looks like all analysed trades are going in the right direction. A pitty is that exactly one is doing the weakest where I entered the position. Oh well, until it makes a profit, I guess everything is fine.

  7. #7
    Join Date
    Oct 2012
    Hi ForExchange,

    I've just bumped into your thread, sounds interesting! As I see, you mainly trade currencies and on a short time frame... I also use cot analysis in my trading, but I trade commodities also! I'll be following your thread with great interest, good luck to it!
    If you have the time, check out my thread that is focused on cot analysis (Follow the Smart Money / COT Analysis).

    All the best,

  8. #8
    Join Date
    Nov 2013
    Hi Dstan,

    thanks for your reply. I see a great strength in COT, it is only hard to discuss it with someone as most people do not use it. I mainly trade currencies, stocks not at all, but I do trade commodities like US Oil, gold and silver.

    However I have a problem with commodities interpreting in the report. There is not column with non-commercials and commercials so I guess Managed Money could be Non-commercial but I am not sure. I also have a problem which crude oil du I have to interpret from the COT report if I want to trade US Crude Oil. There are 3 types of oil in the report: Light Sweet WTI, Light Sweet and WTI Crude oil calendar swap. Can you give a hint how to interpret this one?

    Actually I do not plan to trade for only short time frame. It is only the question of trying to find the right strategy. At the moment I analyse the report, enter a trade and try to figur out where I stand in the end of the week. However I have a bit problem in the beginning with the right stop loss setting and have some concerns: an example: lets say 63% of the people are long with GBP and I am short. Now the question is at what percentage should I exit the short GBP trade? When the GBP Non-commercial speculator long decreases to 50% level or when it is between 40%-30% longs only? What do you think about that?

    I will definitely check your thread since I want to expertise myself in this field and I am happy there is another thread about it!

    Good Luck
    Last edited by ForExchange; 05-30-2014 at 05:47 PM.

  9. #9
    Join Date
    Oct 2012
    Hi ForExchange,

    I’m glad to hear that you are not the typical trader of these days, that you are open to trading commodities (possibly options?) as well.

    Interpretation of the cot report: I’m not sure if I understood your question, but the following may help… the original (but hard to see) cot reports are accessible at CFTC. There are a few services that “do the hard work” and prepare nice cot charts. These are very important, since you need to see the weekly cot report in context, what changes happened in Traders positions compared to the previous week, but also what the big picture is. I believe this can be done most easily by looking at cot charts. I use for analyzing the report, it’s a great service, I can recommend it.

    Crude Oil: 3 types of oil in the report? I don’t think so… The Crude Oil I analyze (I attached a chart for you) is the Light Sweet Crude --> the most actively traded commodity amongst energies. So when we talk about the cot report for crude oil, it is for the light sweet. The cot report that CFTC publishes may also show data on other oils as well, but what you should be analyzing is the light sweet.

    Strategies: COT analysis works best – at least in my opinion – on a bit longer time frame. It won’t be enough on it’s own, you need other TA tools to be able to enter, exit trades, to do your risk and money management analysis… I always say that the cot data can be used in two ways: 1) searching for trading opportunities or 2) as a confirmation tool --> once you have built up a trading idea for a specific market, it’s a good idea to see what the cot situation is: whether or not it supportive of your idea.

    “63% of the people are long with GBP and I am short” --> I don’t quite understand this… for each and every contract there is someone who is short and someone who is long. If you add up the net amount of contracts for Large Speculators, Commercials and Small Speculators, you will get 0. What is really important, is the extreme level of net positions for the different market participants, but I’ll not go into details here, since my thread explains this is details…

    Just, so you see how I analyze the cot report, let me give you my view on GBP (it is actually a market, where I see trading opportunities).

    On the chart below (which is a 5-years long chart – great for analyzing long term trends), you can see that there is a pretty large, I call it, STRESS in the market. All major Traders of the market are carrying extreme large positions, which as you can see, always ended the rally in the British Pound. Doing this historical analysis, we can come to the simple conclusion that the fuel in the current rally is drastically running out. I personally think (cot analysis is very effective in currencies) that prices will reach a top soon or have already reached it.

    All the best,
    Attached Images Attached Images    

  10. #10
    Join Date
    Nov 2013
    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 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

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