COT Report Analysis - a thread on market sentiment

[ForExchange]

@flows

hey guys,

interesting and useful discussion going on here. thanks for sharing your ideas. i will subscribe to the thread and maybe pop a question or two occasionally. i’ve just started paper trading for 2 months (and currently in the freshman year at babypips), so expect some newbies questions. keep up the good work, guys.

cheers.

Hi flows,

you are quite lucky to find this great thread:8: 3 of us are very active here to improve our skills and we are coming slowly in the right direction. Our mentor (I might call him like this) is peterma who writes some short but very informative and great posts here. We take the issues very seriously and are very dedicated to reach our goals.

You started the right way: the babypips.com school is very long but great. It is a hell of a lot of work to do it but your efforts will be rewarded. In the very beginning I found everything very complicated but it gets better and better with the time. You need discipline, dedication and patience.

IMPORTANT: this thread is discussing market sentiment. We do not talk much about indicators. We have all our own technical analysis. Exit/entry points are not the most important. Especially because Mike and rookie are looking for long-term trades only so their success is maybe not dependent too much on a ±50 pips entry point. This does not mean we do not want to jump in at the right time but that is another section of the forum. Market sentiment is a huge topic and very very very important but not discussed so deep. If we get this one right we strongly believe to understand the big picture of the market and try to grab some pips in it.

I wish you a long and successful journey!

[ForExchange]

One more thing “flows” and all other new readers,

this a very active thread where we discuss basically very many things on a daily basis. This is interesting and can be good for learning if you have to time and dedication to read it on a daily basis. If you plan to learn a bit of forex and look into this thread on a daily basis then you will be lost because of the 40-50 new posts. We are active and moving on live with the market changes. A week later it is a bit difficult to understand our decisions 4-5 days before because market sentiment and flow was maybe different.

[MikeWolski]

Hey guys.

Market sentiment, flow, going into US session, up to this point.
Not a whole lot of movement, but, looks like Majors are edging over Comms, a bit.
USD would be the strongest major.
GBP (even given not so good news) close second major.

Comms: AUD definitely strongest
CAD next strongest
NZD

That’s just how it’s beginning, after Asia, and few hours into London.
I think it’s mentionable about AUD climbing already. I do believe the market is watching them and moving before some big news on the horizon.
GBP you would’ve thought would go down a lot more after the news. But not really, climbing some now.
It seems like a struggle between the USD and AUD for the strongest across the board. Both are making strides. So, it’s a tug of war between Majors and Comms. AUD and CAD against USD and GBP.

It’s early. But always exciting to know what’s going on in the battle of the money flow.

Mike

PS…Hey flow! Welcome! Stick around. Much to learn in here. It only makes sense to know what’s happening in the big picture of things. And remember this. No one really knows where price is going to go, but, we can always see the tracks and footprints laid out. Eventually we want to get to the point of understanding what has happened and figure out what the routine of the players look like. And then we just get to making some consistent pips along the way.

[kisslz]

thank u for sharing

[kisslz]

thank u for sharing.

[I]I continue now a new series here, I write here down my own thoughts about my first COT book as I read it. I write down anyway always for myself what I think is important to look it back later, so I decided why not to post it here. Important: I write down the own words of the author, in the right order as it comes in the book. However I will not structure the different thoughts and do not write down which pages they were. I just want to mention the sentences which I find important for myself. This is not the same value for you as reading the book (hopefully you will all read it when you have the time for it), however it is better than nothing. I also make my own summary in the end of each post.[/I]

This review has many information what peterma already mentioned in comment number 139: 301 Moved Permanently

[B]Fading Small Speculators and Other Half-Baked Schemes[/B]:

[I]Tip: Always follow commercials.[/I]
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 occasion when it is safe to buy while commercials are still buying.

[I]Tip: Net long is bullish, net short bearish.[/I]
Large speculators: their market activities are purely profit motivated, so if they are holding more short than long positions in net, you could say that as a group, the funds are bearish.

[I]Tip: Always fade the small speculators.[/I]
The includes small commercial hedgers as well as small speculators - a critical, frequently overlooked nuance. The presence of commercial hedgers makes categorizing problematic.

[I]Tip: It is only logical to compare hedging to the seasonal average.[/I]
I grant you that it may be logical to assume that commercial producers and users, at least in agricultural markets, have hedging requirements that might change with the seasons. Seasoned charts are easily assembled from weekly COT data; just sum the net positions by week and divide by the number of years.

[I]Tip: the COT is old news by the time it is related.[/I]
You will come to appreciate that analyzing 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.

[B]Net Positions [/B]
The Commitments of Traders reports are devoted exclusively to the domain of open interest. There is no price or volume data contained in the COT reports.

[I]Open interest:[/I] open interest is the total number of open contracts at the close of trading.
The most common format used to visualize the Commitments data for analysis is a net position chart. Important are the comparative levels and patterns visible, particularly hen net trader positions are compared to price actions.

[I]Large speculator patterns[/I]: the weakness in the funds’ approach is that they typically are caught holding their largest position - in the wrong direction - at market turns.
The large speculator group reveals a strong pattern of trend-following trading style. This is the group that fuels trending moves.

[I]Commercial patterns:[/I] unlike funds, commercials are usually positioned to profit at a trend change. It is rare to detect commercials running out of buying (or selling) capacity, no matter how far prices may move against them.
Funds buying and selling fuels uptrends and downtrends, respectively, while commercials buying halts downtrends and commercial selling caps price rallies.

[I]Small trader patterns:[/I] the variability in trading patterns makes the small trader category the least reliable in terms of market timing.
In general, the small size of their market share and the unevenness in trading patterns keep them from being reliable trend indicator (or consistent counter-trend indicator, for that matter).

[I]Summary[/I]: this was the most interesting part of the book until now, and Mr. Briese writes that the chapter on Net positions is the most important. Much more I cannot write about it as there are many graphs and examples. Only because this one chapter I think it already worth it to read this book. What is interesting for me though that I do not always find that the “5 Tips” Briese wrote, he really follows it too. For example he wrote to follow the commercials but it is not really the case what he does as I read the book. Or probably it is the case but it does not make that impression. “Net long bullish, net long bearish.” - well this might be true as well, but net long who and net short who? Quite important to know of course.

[kisslz]

Hi, The Three musketeers , Question:the changing of open interest can tell me what ? increase means what ? and decline.

[ForExchange]

Hi, The Three musketeers , Question:the changing of open interest can tell me what ? increase means what ? and decline.

Hi kisslz,

as you read in the other post:
“Open interest: open interest is the total number of open contracts at the close of trading.”

What is very important about open interest: it shows you the [I]number[/I] of open contracts, but does not have to do anything with [I]price or volume[/I].

It is still good to know the number because it shows you basically the demand/supply for a currency. For example: NZD has 30 351 open interest and EUR has 356 865. Although we do not know the volume of these contracts, I think it is quite save to say that there is a lot more interest in the market for the EUR than for the NZD.

I come to 3 conclusions:

1. On one side open interest is good to see how much attention does a currency get.

2. The second important fact is too see that I keep track on a weekly basis if there was a significant reason for open interest change. Like I said the number does not say anything about price but if there was a huge change I try to look after and understand what has happened and why it changed.

3. It is written no where about the COT report, but if you read Forex books, they say that more liquid currencies have less spikes and very short-term fakeouts. So with my interpretation this means with more open interest we can plan more reliable trade setups and there are less unexpected “jumps” in the pair.

Hope this helps!

[MikeWolski]

Hey guys…

(3 musketeers)…funny!

Anyway, as I take a quick look at what’s up in the market now, little after london over, we have the comms charging back now. Looks like CAD and NZD coming up with the AUD been leading the way so far.
Watch 'em.

D’artagnon

[ForExchange]

Hey guys…

(3 musketeers)…funny!

Anyway, as I take a quick look at what’s up in the market now, little after london over, we have the comms charging back now. Looks like CAD and NZD coming up with the AUD been leading the way so far.
Watch 'em.

D’artagnon

Hi D’Artagnon,

great observation. I do not trade them now. I lost confidence in commodities. I am not sure if it is just a short-term bounce. We will see. Especailly since AUD Trade Balance comes out in a couple of hours. Don’t hurt yourself!

Good luck still!

[MikeWolski]

Ha Ha Ha !!

Hey everyone, I’m not the leader. (He’s the only one I know of by name)

FE…your our leader.

“All for one, and one for all” !!

[ForExchange]

Hi Mike,

well no need for leader, but just for cultural facts to learn something besides forex:

Athos, Porthos and Aramis are the 3 Musketeers. D’Artagnan is basically the fourth person but not a Musketeer. There was no leader in this story. The most respected and loyal was Athos, Porthos was the largest and true friend without much thinking and Aramis was the one with connections and who enjoyed life but built a career at the same time. What many do not know though that it is a trilogy. In films they only show the first part when everything is fine. The other books are great too but show the different path of the 4 people. The third book is kind of sad with basically different intentions already of the 4 people. Porthos and D’Artagnan die in the end of the 3rd book. Wish better luck for us!

But what is completely true:

“All for one, and one for all!”

[ForExchange]

[I]I continue now a new series here, I write here down my own thoughts about my first COT book as I read it. I write down anyway always for myself what I think is important to look it back later, so I decided why not to post it here. Important: I write down the own words of the author, in the right order as it comes in the book. However I will not structure the different thoughts and do not write down which pages they were. I just want to mention the sentences which I find important for myself. This is not the same value for you as reading the book (hopefully you will all read it when you have the time for it), however it is better than nothing. I also make my own summary in the end of each post.[/I]

This part is going to be a bit other than the others. I will do not have a Summary at the end, it makes more sense to integrate it into the chapters. You will see why!

[B]View from the Gallery[/B]

The following two chapters did not start very interesting. The chapter with “View from the Gallery” was a real fight to finish. It contains 11 studies of 50 years. The findings are contradictory and sometimes were not interesting for me at all.

I grab out two thoughts that we knew already without making studies:
“For positive trading results, you must generally do just the opposite of commercials: buy when they begin to sell, and sell when they begin to buy.” and
"Small traders are the big losers and large traders are the big winners."

Here comes then a good summary from the author himself. I write here only a part of it:
“The weight of the academic evidence seems fairly conclusive that large speculators are positive-feedback. This supports the general conclusion that hedgers tend to lose money, while large speculators sho net profits from futures trading. Most of these profits are attributed to simple insurance premiums transferred from commercial hedgers to speculators. It is assumed that for commercials, hedging is a cost of doing business, for which they compensate through profits in their corresponding cash business. Most interesting to us, Wang finds that trading rules based on both extreme trader positions (COT Index) and trading surges (similar to the Movement Index) produce profitable and substantial returns for holding periods out to eight weeks.”

One more thought to this chapter. One study was actually the article which peterma posted here:
“Exchange rate changes and net positions of speculators in the futures market (2004), Klitgaard and Weir”. They tracked the large speculator movements and found out that their movement 75% follows the exchange rate direction in the given week however they state that net positions are not useful in predicting exchange rates for the next week. Now Briese has an important point here. He argues why Klitgaard and Weir took the prediction of trades for a one week period in the future and not a longer term. With longer term forecast (which is the COT report probably for) the study could have produced completely different results.

[I]I think this last point is very important: how long should someone hold a position if get a signal from the COT Report?[/I]

[B]View from the Pits[/B]

This was a short chapter but interesting. Briese made his own simple COT system with basically making trades from large speculator COT Index moving average crosses.

This is a very interesting comparison and the results were very good. However I cannot say which were the values for his COT Index moving averages as he used completely different values in all his observed 35 markets.

If you have the book, these values are on page 101. Briese also states that his simple has many drawbacks and have a lot more potential to make it better, he just wanted to try the most simple way to see if it worked.

Some of his thoughts from this chapter:
“In creating trading rules under realistic real-world conditions, we cannot consider the COT data signals until after the data release, which is not until 3 to 10 or more days following the actual compilation. In the real world, you cannot peek ahead to tomorrow’s newspaper in making today’s trades.”
“When you work with the actual release dates, you find out that the publishing lag matters - a lot.”
“Planned losses may not be pleasant, but unplanned losses can put you out of the game. The COT data may alert you to trades that price-based indicators miss. But keep in mind that the reverse is also true. If a COT signal is employed as a mandatory condition of a trade-setup, it is entirely possible to miss a major move. If you are the type of trader who would rather take multiple losses attempting to enter a trade than to miss the move, make sure that you have a backup trend-catching option in case the COT signal never comes.”

Altogether one interesting chapter and one boring but for sure they raised many questions and made me think about further issues with the COT report. The different studies showed different views of the COT report. More questions are raised but more problems are solved at the same time.

Lets see what the next chapters bring!

[MikeWolski]

Hey guys.

I work off of the London close (my broker). So, right now it’s approximately 00GMT. And I just now tallied up them up for the day. I think it’s interesting.

Let me clarify for any others who are keeping an eye on this stuff also. I tally up who’s the strongest down to the weakest for each day. I do that by counting everyone’s daily candle. Either someone had an up day, down day, or it was even (-10 pips and lower). The 8 most popular currencies. That will be 28 total different pairs.
Here’s what I got today.

Currency: UP DOWN EVEN

    GBP: +6        0            1   
    AUD: +5        0            2 
    NZD: +4       -1            2 
    CAD: +4       -2            1 
    EUR: +0       -4            3 
    CHF: +0       -4            3
    USD: +0      -4             3 
    JPY : +0       -4             3 

So, I would normally just say the line-up. And you see it there, who’s the strongest down to weakest.
Notes: Just so interesting how EUR, CHF, USD, JPY are all tied for the weakest. They all were not up on anyone. They all were down against the top 4. Another interesting fact is the comms out did the majors +10. Pretty sizeable. And we see that the strongest was GBP. They were the only major who had an up day, on any other.
So…we had a major on top, comm day, and a whole lot of even.
Very interesting to me. I don’t see that much.

Be in touch. Bedtime now.

Mike

PS…Fe!! That was awesome of a write up on the musketeers! I so enjoyed that. I did have such a good laugh about the whole thing today.

[Nebula9]

Hi rookie,

Yes, I read about the importance of the correlation between net position and price level change in the bible. It is a great tip as I never thought of it and actually without the price level it is hard to understand the story. We do not only have to look what happens with positions but how price reacts on it. For this purpose, if I post the net open positions for non-commercials, I guess you do not have to post it for the commercials as they are basically the same in the opposite direction. It is important though that you look how people reacted to the new commercials moves. That might be a bit different then non-commercials and it could help us!

Your last paragraph is the point. I think you made a mistake thought. You wrote: “Since commercials hold a bigger portion of the pie when they [B][I]start selling[/I][/B] there will be a turnaround. And commercials knew that NZD couldn’t jump higher than what it already had at least for…” Did you meant to say when they [I][B]start buying[/B][/I]? I mean commercials were selling the whole uptrend so they have to start buying now.

Good luck!

Hey FE!

I really appreciate that you’re posting paragraphs from the holy bible! :59: as I don’t have time to read it through myself for now. I think I meant to say so ‘start buying’ I’ve still got a lot learn about properly interpreting COT data and as regards to that you’re few steps ahead of me. So i’ll listen what you have to say.

Now that you’ve mentioned the importance of correlation between net position and price level I think it all makes sense now how NZD bias according to non commercials came out bullish for the last few weeks but price kept shooting down.

I’ll keep up the commercials analysis but on an excel sheet as you suggested contrast of net position and price level changes should be more clear that way. I went few pages back and reread peterma’s post about how he views commercials GBP net position changes and I must say I was fascinated by how he viewed things and it seems to make ALOT of sense. I’ll take that into account when I’m analysing commercials data from this weekends and onwards.

And I’ll also try to keep track of energy and agricultural commodity futures. As we’ve talked this might give as an edge it’s never enough to have one more confluence factor :D.

PS: Sometimes I tend to get too excited and forget the fact that COT data covers futures market not spot forex. And I always appreciate Peterma’s posts on this thread!!

[ForExchange]

Hi guys,

good posts at night. When I wake up always something waits for me Today I am quite a lot away from computer but I try to share my thought fast and reply to your posts:

1. [I]Mike and the USD[/I]: first of all, did you mean US Session close? At the time you wrote looks more US Session close. But it is not a huge issue, I was just picky. I like in your table today to see a bit of a bounce from the commodities. I do not make much conclusion from it though. Both GBP and commodities had huge losses, they had to come back at least a bit. The interesting questions is if it was only a 1 day correction. I wanted to stop for a moment to show maybe a bit USD strength here. Look at the AUD. Yesterday great news and today early great news with very strong trade balance (-1.68 vs -2.0 expected). Still the Aussie won about 10 pips vs USD in the whole session with such a number! That is nothing. I have to say though that it might be a weak Aussie for this performance and not the strong USD. I clicked through my charts now and the Aussie did not make any good wins with the good numbers against any currencies… I agree with you that USD was weak yesterday but we should not forget that even strong currencies cannot win every day and every hours. USD lost maybe 20-30 maximum so no one really gained on it. My problem is that I am influenced by the Dollar rally lately and try to confirm my decision I still see bullish signals though.

2. [I]rookie[/I]: yes, that is why I share the book. I find it very informative but I know you guys do not have the time to read. It is a pitty though that you do not see that charts and examples. You can learn the most from that. Maybe if you have more time you can still read it.

I want to answer for your last paragraph because I was thinking that same yesterday when I read the Bible! I mean here about analysing the other market. I think too, that COT data has many market and we only look at spot. I thought if 1-2 guys join we might give this work for them about agricultural products, metals and petroleum products for them. As I read in Market Wizards many technicians said the market does not matter for them as they look at candlesticks and not what they buy/sell. I think it is something similar with COT. I do not care if I made money with EUR or Butter. We can do business with all these products (depens of course what your broker offers). I still do believe it is better to have someone who knows a bit the market because Cocoa might have other trading habbits then JPY but with small positions we can try. The problem with our analysis that we look at 7 markets (USD is not in COT) and it is only a little part of the report. Loooking at the book, COT signals do not come very often for a currency/commoditiy. Maybe once a year comes a clear long term signal. Now if we had people to watch out for everything we might have a clear signal in every month or every second month in a specific market (orange juice, silver etc.). That would increase our effectiveness in a huge way. If you want to do such a job, great, but I think it is not managable or you burn yourself completely out in a couple of months with so much work.

Have a nice day guys, we have GBP and USD reports waiting for us today.

[MikeWolski]

Hey guys.

Well, this is what I got for Tues. And this is GMT 00. So, my open and close daily candles start at 00:00 and ends at 23:59 --GMT.

GBP +7 0 0
JPY +5 -1 1
USD +4 -2 1
AUD +4 -2 1
CHF +2 -3 2
EUR +2 -4 1
CAD +1 -6 0
NZD 0 -7 0

So, GBP is definitely the strongest. And it’s kind of not fair, but, the NZD’s big data came out like an hour before the end of the day. And it wasn’t good for them.
Man…what happened to CAD?
OH, the split. Majors took it +10. And that tied up the week. All even now. Interesting.

See you guys in the a.m.

Mike

[ForExchange]

Hi guys,

sometimes it is good to share also some good news. Yesterday with good USD long setups I made a 5-0 winning strake! Only if I did not have those long HUF trades…

Have a nice day!

[MikeWolski]

Well, getting ready for the US session today (wed), looking like the JPY is taking over. Definitely stronger across the board since the start of the day. AUD, USD, pretty strong. NZD making some corrections back up some. I would have to say the GBP is the weakest of them all. Which is just some correcting going on. They were on top the first 2 days this week. So they are the ones most short on against the others.

FE…I’m having a good week. It’s so interesting how so many trending pairs were taking out last week, but this week many of them have corrected back to trending. So, therefore I got back in. Making much on the USD.
These, according to my calculations, are the ones I deem are trending, “longer term”.

USD: EUR, CHF

AUD: CHF, EUR

GBP: NZD, EUR

So, I’m in with them. Plus these 2 (not really trending yet longer term, but heading that way)
NZD/USD –
USD/CAD –

BTW…rookie! You in with NZD/USD? My limit order took. And it’s looking good so far. The USD/CAD limit order took also for me.

Now, it’s all about managing all of those. Longer term.

Mike

[ForExchange]

Hi Mike,

pay attention with comms! JPY is strong because sentiment is on safe havens as the Russians are getting “more aggressvie” in the direction of a war vs. Ukraine. They also plan a revenge with sanctions against Europe. I do not know how long this negative sentiment holds but at this time it is like that.

Oh boy… you and rookie with your GBP longs! I hope it will not hurt too much! At least you chose two weak currencies!

USD/NZD is my best bet too.

So you do long-term and I get ready for my short-term USD and CAD news in 23 minutes!

Good luck to us!

[Nebula9]

Hey guys!

I meant to post a reply back to FE but have been occupied last two days but I will around the weekends.

I haven’t went short with NZDUSD yet, I’m not sure which TF you trade from and what technicals you use. But for me I trade from daily TF and draw fibs and enter at the end of the pullback beginning of trend continuation. I tend wait a lot just to be safe. If you’re looking at daily TF there’s couple of bullish candles I was eyeing on them to go higher and eventually close below 38.2% then I was going to go short. But it seems things aren’t going to be that smooth with NZD right after those couple of bullish candles there’s a massive bearish candle closed below fibs 0 not sure what to make of that. So I’ll wait and see what happens NZDUSD on hold.

USDCAD seems to heading up but I don’t see a good entry point for USDCAD from dailies I’ll wait. I’ll go short with EURGBP and EURAUD probably tomorrow morning entry is almost there I’ll go over daily candles after NY close. I agree with you they seem to be still trending, but beware with EURAUD at around 1.41 there’s a major support level same for both weekly and daily TF one more leg down touch down at 1.41 and things might turn around.

It’s been a good week so far! Glad to hear you guys are pulling in some pips!