COT Report Analysis - a thread on market sentiment

Trading Discussion News and Economy
2488

Hey guys.
One more thing. Take a look at my last post. It shows the results of each currency. And what I have been thinking seriously lately is this. Just imagine trading a currency across the board. Either for a week, or couple weeks, or a month. And as I run these numbers, you would be able to see how many pips you would’ve ended up with. We’re talking in the hundreds. This is what I’m talking about. Even look at the chances of being in the positive as opposed to being in the negative. I guess it could be about a 50/50 chance. Probably even better.
Ok. So…Let’s look back at the month of Dec. Sure, if I would’ve taken the USD across the board that’s 2013 pips for the month. Ok. Then on the other hand, whoever would’ve shorted the JPY lost 1006 pips for the month. But given their safe haven status, that wouldn’t be smart. The NZD across the board for the month would’ve been awesome. And how about shorting the EUR for the month. 2159 pips is a lot of pips!
Look, I know about hindsight. And we just do not know what the future will end up looking like. But, all we want is an edge. And all I’m doing is comparing each of these currencies. And I believe, as we all do in regards to the longer term time frames, are MORE SO predictable than shorter ones. Things change less as the farther out you go. And that’s what I’m talking about here, weekly and monthly data.
And the question to me would be how much position size to put out there, or on each.
I’m seriously thinking of going long AUD across the board. I know about the word on the streets regarding what their central bank wants. But, is that what the market is wanting?
I just looked at the Nov. results for the AUD. They ended up with -1537 pips. And back in Oct. they were on top with +1199 pips.
I know I have said that they were coming up a few weeks back (early this month), they were, but dropped back out. I’m just thinking it must be the end of the negative monthly pips. And if I do this, I think the odds are in favor of positive pips, for a months time. I’m also thinking that the confirmation of their turn around is week #4 and week #5 (of Dec). Look at those numbers.

TALK TO ME

Mike

2489

Hi Mike,

the idea is good I think but the interpretation is not, at least that is how I see. Regarding the AUD, I also expect pullbacks but not because they lost in the last “x” months. Just think about it: the EUR is losing vs. the USD since May 2014. With your approach you could have gone long with EUR after 2-3 months becuase it has lost so much that a turn should have happened. We know it didn’t. You would have erased your account.

The other problem is that it is very difficult to calculate your risk. How do you calculate your risk when you enter 7 AUD trades for a period of 1 month? I think it is very difficult.

I am interested to see how you solve these problems and how you develop your interesting stats. Thanks for the Dec. results!

FE

2490

Hi Mike,

I was thinking on your approach today during my running. I came to some conclusions. Your topic is very unique, I have never heard about it. Maybe you can even start a thread about it, but I think it is very hard to find followers as it is completely new. However with a lot of patience you might get after a longer time some people who will involve them into it. Of course you can post everything here, I just said my opinion if you want help with it.

On one side it is so unique that if you get it write, maybe you can even write a book about it. It is completely new I believe. On the negative side you have to ask yourself why nobody has ever done this approach. We have to be critical on ourselves as this is the only way to get better. I think your approach is very difficult to make money with.

I can only tell how I use your stats. I like your daily write ups as they show me the current strength of the currencies. However about the weekly and monthly results I am more sceptical. I think they are more interesting than a useful tool for trading, at least at this moment. Of course sometimes I ask them from you, then it is different, I need in those time them for some reasons :slight_smile:

Saying all that, besides what you wrote in the above post (about risk), I have two major problems:

[B]1. Your monthly report lags in time[/B]
If you remember, with Peter we discussed in the beginning of this thread that COT report is a lagging report with 3 days. Later on, we discussed this same issue with BB.

Now think about it: if you make your report on the 1st day of the following month then the newest data in your report is 1 day old, the oldest is 31 days old. That is lagging a lot behind the market. Maybe even too much.

[B]2. You go against the trend and do not consider fundamentals[/B]
The even more difficult part is this second issue. If you are late 1 month in a trend then you can still make many pips so the first issue can be solved. However if I understand your approach, you are not taking advantage of the trend but you are a contrarian trader. I also trade sometimes contrary, especially if I can buy S&P cheap on a retracement until it does not turn back. However trading contrary is dangerous and not easy. Actually the COT report is also contrary trading :slight_smile: In the last months we also got some hits with BB because of that. You also do not consider fundamentals factors, you just want to enter the trades based on which currency has given up how many pips.

I give you an example. With your approach maybe we would have gone long with JPY vs. USD after USD managed to about 114 or to 115 after a whole lot of gain. You would say based on your stats to go long JPY because it has lost a lot in a very short time. Now it could have been disastrous if you went long JPY across the board too early.

So that is how I see it, think about it and you can correct me if I got some of it false.

FE

2491

Just a seasonality update. January is the strongest month for the US dollar. That fact is sort of comforting as may be if seasonality holds this year, Jan would be a temporary top in the dollar and we see a pullback in the greenback after a 7-month rally.

As for oil I think I said before that I do expect to see a green candle in the month of January, could be wrong though. I do have the week of January 12 as an important week for oil, so there should be a significant move during that week.

2492

Hi Philip,

thanks for your update.

Well I guess it is good that you wrote you do not expect a strong month for oil. I say good because if you believe USD will have a strong month then it will be hard to have a strong month for oil at the same time. So most likely one will have a good month and one will have a bad one. At least that is what my intermarket relations book says :slight_smile:

FE

2493

Hey Mike,

I agree with most of what FE has said. But to add few things. I suppose it all comes down to what your main goal is : are you in to make a living or are you interested in the flow of things more ? What you’re doing no one has ever done in the past. But its not in real time. And here’s something to think about why not just look at your charts - live ? PA that we see on our charts pretty much absorbed everything. I’ve been learning that technical way of trading isn’t all too bad after all and may well be the smartest way to make a living.

Whilst doing the COT analysis - analyzing the big guys moves I have realized that it can be handy to spot corrections but not so much about actual reversals. And those corrections just happens to be at major S&R levels weekly. Now I’m starting to second doubt its crystal ball effect. It may well serve as a confirmation to give us a piece of mind but I hope you see what I’m trying to convey here.

Intermarket analysis and fundamentals still are placed higher up in my priority list but COT not so much as far as currency trading is concerned.

And last but not least keeping track of things is great ! but can you keep up with it as it constantly changes is it not faster and easier to just look through your charts ? I just feel like what you’re doing is a lot work of if your main goal is to make a living. Why re invent the wheel ? They’re plenty of tried and tested profitable systems ?

2494

I hate it when people put words in my mouth hahaha.

I said “as for oil I think I said before that I do expect to see a green candle in the month of January.”

So to be as clear as day, I am saying both dollar and Oil can gain in January. If intermarket does not agree, that’s ok because it doesn’t change what I’m seeing on the charts and on seasonals.

2495

Rookie, you certainly have a point, but I don’t agree with you completely. In my opinion, PA is the most deceiving trading method out there. It is so subjective to the point it becomes useless. I doubt that by solely looking at the price, a trader can make informed trading decisions. Anyway, if there was a way to make money consistently with a Technical system, a programmer guy would probably own most of the free world’s money.

Although COT analysis is far from being perfect, combined with Intermarket Analysis, you get a pretty solid formula to base trades on.

2496

It’s likely that USD will continue to rise, it’s also likely that Euro will continue to fall, even though it has reached the much predicted level.

The reason for these probabilities is that Yen and Euro weakness, combined with downgrading of UK outlook leaves the USD with little choice.

The seasonal trend on EuroFX on the CME is 15yr trend - rising rapidly from mid Nov to peak at end of Dec, then series of lower highs to mid Feb, at this point the 5yr and 15yr converge with a steady rise.

The 5yr EuroFX diverges from the 15yr in that it shows a steady decline from the second week of Oct right until the end of the first week of Jan, even then it’s recovery is modest, and falls again in Feb to converge with the 15yr pattern.

USDX on ICE likewise disagree on 5yr vs 15yr, the 5yr pattern shows a steady rise from mid Oct, all the way up to the beginning of the second week of Jan, then begins to fall off, then continues to rise.

The 5yr pattern seems to be the more accurate. The patterns relates to the March futures.

There is no point looking to seasonality on oil in the present climate, if someone asked me do I think that oil will rise in Jan 2015 I’d answer simply - I have no idea, the only thing I can say is for each of the past 6 months price has been falling.

If someone asked me can the USD and oil rise together, I’d say sure they can, if someone forced me to buy either one or the other which would I choose - well trading is about probabilities so probably …

2497

Hi Philip, BB, Rookie and Peter,

these discussions were interesting. Based on what Rookie said, I am more with BB, but I also agree with Rookie. I think it is important to say that many technical analysts are only great in analysing after everything happened. The books are also based on past analysis. So they just find the right TF after the fact and say expressions like “it was obvious” etc. That is b…sh.t. It was only obvious after the fact. When I watch technical setups on the internet, pretty much all of them are wrong. They said already to buy gold and silver a trillion times in the past year. And where are these two??? How come all the important levels were just broken one after the other? As BB said, COT report is also limited in some sense but I like the basic information it tells me: “if everyone has sold everything, who can go short now?” - and vice versa.

Still, Rookie has a point how important the weekly and monthly levels are. I also like to pay a lot of attention on those. Not because they decide the direction or change fundamentals but they show us what other people might be watching. So technicals are definitely the fastest confirmation of price action and the only way to look the live action of the market. And without good technical knowledge it is hard to make money. At least that is how I see it. My only problem is when someone uses the sentences like “it is obvious” and “it is clear” that they always only present the support and resistance zones which held and worked out perfectly. They do not show the 90% of the charts when they did not hold at all or they were easily broken without a retest. So I think these zones are very important but we have to put it into the perpective of the fundamentals.

Philip, well it is interesting about oil, I will be watching how it works out. Like Peter, I also go with the trend and do not try to pick bottoms but I definitely do not disagree with you that it can rise in January. Why not? For me it is ok. I look at the stockcharts oil shares every day, we can discuss live what we see.

Peter, the 5yr and 15yr example was interesting and I cannot say much about it but as always it is hard to disagree with you as what you write has always a lot of wisdom in it.

Have everyone a nice Sunday,

FE

2498

One more thought which is in connection with the post above.

I find it funny how in every 2-3 months we try to discuss what is more important: COT, fundamentals, technicals or intermarket analysis.

I like to put it the way Philip said: COT report is good for the direction and technicals come then to trade it. This is simple and I like it. I like to put intermarket analysis to the COT report as we study intermarket analysis it seems to me to have a great power and a very interesting field. So it is good that Peter tells us more and more and I think when BB said we can combine it with COT, then we will have a huge weapon. Something like the Sniper gun in Counter Strike…

FE

2499

Good posts FE.

I find it difficult to discount any portion of market activity and then say I am going to put hard earned cash into that very activity.

I like to think in terms of risk on/off, some call it fear or greed, others call it exactly like the thread title - market sentiment - so I visualize the fear/greed or risk on/off. That visualization is helped by TA/PA on a chart.

Recent example was the S&P sell off, analysts said “profit taking” (risk off).

I remember one trader talk about the S&P and when it is in a bull trend and makes a new high. He spoke of the various signs that the new high was at exhaustion of the trend, most of the stuff we have spoken here about. Then he said almost always, after the new high and price is coming down, there will be one more attempt by the bulls (risk on) but they will not make a new high, the best they may do is equal the previous high (Dbl Top) though usually they fall short (Fib Retracement) and are swamped by the sellers (risk off).

When I see that final push up, all the sign in place that there are not enough bulls, that risk is off, and then the chart shows the failure, I imagine the fear, the quick exits or stops by the bulls all sell orders, the other markets calling risk off.

The guy that trades dbl tops got it right, the guy that trades fibs was happy, the candle trader probably saw a pin bar and took it and so on.

But if the signs that we talk about were in the opposite direction, if the fundamentals were saying that risk is still is on, and a little pullback happens, then the fib guy or the Dbl Top guy lose.

2500

Hey fellas!

I really appreciate your feedback. And you have definitely made me think. You are making good points.
To reiterate: I’m looking at past data (history), and lack of fundamentals, and contrarian type style.
Now…with an open mind, I gladly accepted the criticism. But, I had to dig deep to find the heart and soul of my reasoning for a method like this. And here are my answers to your very good points.

Dealing with past data. History.
When I think about it, aren’t we ALWAYS dealing with past data? I mean, there isn’t any other possibility. We have the past, present, future. The future hasn’t happened yet. We’re talking about the past. And the present…ok…let’s talk. We can boil it down to the most fine point. We look at the charts, price movement is happening right now. We can move the time frame down to the tick movement. So we are seeing, in the present, what they have decided to do. Which is something done in the past. The whole question here is where do you draw the line from being in the past to being in the present? Someone can say the past is a day. Someone else can say the past starts 4 hrs ago, and also be right. All the way down to a second can someone say that was the past. And you Rookie do make a good point about price action. It is what we are seeing happen. But technically and scientifically speaking I would like to know when the “present” is separate from the “past”. Because I can technically say that price action is the past and be correct. It’s the closest thing to being in the present that we can come to, in the market. So, given all that, we all are dealing with degrees of the past. And in the market we are all trying to find some kind of patterns, repeatable actions to exploit and take advantage of. It’s a very difficult task to predict what will happen in the market, even when the entirety of the possibilities boil down to either one of two directions. But the good thing is that all participants are human. And we are all cut from the same cloth. Humans are creatures of habit. What we do in the present is what we have done in the past. The trick in market is to find out what the masses are deciding. And again, it’s either one of only two different directions. And that leads me to this most crucial, heart and soul, tipping point, factor. (All this is because how I have my charts set up) [B]I see the currencies move in sync.[/B] When I see one currency move, I see it move across the board. Sure some factors will make it move a bit slower or faster than another (it’s the strong/weak aspect of that). But besides that, one currency pair just does not move alone. The players who move the market move an entire currency across the board. That is undeniable. You will not see a currency move in the opposite direction in another pair. It just does not happen. If the GBP is moving up against someone, it’s not moving down on another. Now there are degrees. Like it can move up 10 pips on someone who is weak in a matter of a few seconds, and at the same time it will be moving up only 5 pips on someone who is stronger. Or even not move at all. But NOT in the opposite manner.
Now that nugget of truth tells me a lot. The currencies moves across the board in tandem. The players ARE moving a currency in multiples. (I have a feeling that there is a lot of linking). One the other hand, what are the possibilities of it being the entire masses are thinking the same thing, trading the same way second by second? I won’t buy it.
And when I see the numbers, it’s just a matter of how much one currency is stronger than another. That’s the fun part, using the tipping scale to weigh each one against another. We have the USD as being the most weighted currency now. We will also have a very weak currency against all the others. And we will have many currencies tipped slightly one way or the other. So my point is there will always be a spectrum. We will have the strong, the weak, and the in-between ones.
Given that truth, we can figure out how to play the game. And everyone knows that going with the trend is the most logical way. Don’t get me wrong, I do think that’s the best way to go about predicting anything. Creatures of habit WILL produce trends. But where do you get in? At the top? I do know another fact about the market. It changes. I see the numbers. (It was very very interesting to go back into history (on the monthly charts) and see some very long trends. The currency that has the greatest length of trending high against all others is the CHF. They have appreciated the most out of everyone throughout the years. And guess who is close behind them…JPY…They have appreciated extremely across the board since the '70’s.) And it only makes sense to capitalize on a trend is when it is in it’s infancy, moreso than when they are already trending high.
That’s what I’m looking out for. Change. When my numbers change from “ranging” to “trending high”, that will be my signal to get in. And over time my goal will be to be able to say that if something is trending high, I’m in it. To look back at last year, I wish I would have jumped on the USD in June. And kept it going till they are not trending high anymore. Which is still going. Do you guys remember a few months back when everyone was saying that the USD is overvalued? You guys been jumping out. But my numbers were still showing trending high. And they were apparently just taking a breather. They did end up, by far, the strongest currency.
So that is what I’m planning on doing this year, regarding LONG TERM TRADES. And I have a list of all the long term ranging pairs. And the price at which they will turn to trending high. Whenever they switch to trending high I’m going in. Maybe if the USD corrects a lot across the board, BEFORE they would switch to ranging, would I get in on them. And I plan on holding it according to the time frame period. Months.

I’ll be right back with some more thoughts, and issues to address.

2501

Hey guys.

Since I look at the big picture, I must look at the fundamentals. My whole point is the numbers that are produced is a reflection of the fundamentals, moreso the farther out you are looking at. I simply do not have in mind trading the JPY long. Maybe possibly for a short term risk off scenario, but surely not long term. Because the numbers just do not show that. I look for patterns. No one can say that the market is chaotic. There is order to it. And it all has to be put into the specific perspectives. I just seems to make sense, in order to know what’s going on in the market, to keep track of who’s stronger down to who’s the weaker by counting the pips made on a weekly basis. In fact, the spread of pips of one currency to another should reflect the stronger fundamental bias one has to another.
I also can tell many things by counting pips. In whatever time period. I’m collecting facts by counting pips.
I see that ANY ONE CURRENCY can have a good day. The stronger currencies have many more good days than bad. And I can see the longer term trends change by what happens on the shorter term time periods.
It’s all about seeing the flow. That is what I want to know. And the reason is to capture part of the flow. No one can expect to know what’s gonna happen next. But I believe there’s a better chance of being right when you know what the flow has been, than any other method of prediction. Of course the more knowledge you have the better. And I think there’s knowledge in current events, and fundamental comparison.

Maybe I’m talking about the obvious, but, I don’t see a smarter way. For my mind that is. (simple minded)

2502

Hahahahaha! Awesome post! Especially with the last sentence. We should write it down and all technical analysis books should start with something like that. :slight_smile:

2503

Hi Mike,

you had some nice thoughts in your writing. I think a little structuring in your posts would help to better understand them. You are absolutely right about the USD, I definitely jumped out way too early.

I still have a little problem to see how you will trade. Maybe you can share with us live when you enter a trade and why you enter it.

In the end every trader is different and we have to find a way that fits to us. So maybe something fits to you, something else to me and Rookie finds good something completely different.

I find one little part of your first post which I find very dangerous:

[I]“And it only makes sense to capitalize on a trend is when it is in it’s infancy, moreso than when they are already trending high.”[/I]

I cannot say that your above statement is not true because we are all different type of persons, like I wrote above. However remember how often Peter told us not to catch bottoms. I still tried/try it and most of the times it does not work at all. I lose maybe 10 trades and win 1 when I try to catch bottoms. Saving all those pips/money when I tried it, would be a nice some by this time. I also read many threads. If you also read writings from great traders, they would disagree with you. They do not want to be in it on the bottom. They also do not want to be in it in the end. They want the juice part of the middle. And in case they are in it at the reversal (because they did not exit until that time), they just exit as soon as they can. This is something to think about.

Keep on your good work,

FE

2504

The obvious. Hmm.
I do fine with trading, but I have done better at some other things. One thing I know, after many years doing skilled and semi-skilled labor in a couple of industries, is that careful attention to the obvious and practicing the basics that come from that careful attention is what makes one an expert.

Thanks for sharing your efforts and experience.

2505

I shared yesterday with a trading friend an article from a wise person not associated with trading. Our conversation, by coincidence involved the word ‘expert’.

“Preparation is no guarantee that you will be ready; it may actually blind you, because you prepare according to your own idea. There is no substitute for an open heart; learning sometimes has the effect of closing the heart, and in some cases even the mind”.

Sometimes my posts seem complicated, this is because I am a poor communicator, the reality is the market is not complicated, it is only as complicated as we want to make it, likewise it is even more simple than we wish to recognize.

2506

I will not buy oil as well by the way (Again, you guys putting words into my mouth :P) If you remember correctly I said I will only sell oil from now on, so my bias is clear.
I just said I expect to see a green candle in the month of January.
The only trades I’m in are long USDCHF and USDJPY.

2507

One of the first trading ideas I had Mike was very similar to this. I used to determine which currency pair had favorable upward direction in the coming year (let’s say USDCHF)…I’d bay the pair everyday from market open and close it minutes before the daily close.

My idea was exactly similar to yours, since dollar was stronger, it is likely to have a more good days than CHF and eventually I’d profit.