COT Report Analysis - a thread on market sentiment

Trading Discussion News and Economy
281

Hi guys,

sorry, I cannot reply to the posts now, only 3 thoughts:

  1. US Air strike on Iraq not long ago. This might change sentiment for the afternoon.

  2. Yesterday I watched in a live webinar from my broker. I asked the Senior Analyst if he is on all USD pairs bullish medium term as he sounded like that. He said yes (which is my bias too), but what is more interesting he also added that USD had a lot of gains recently so he expects that next week we might see a correction. It is his feeling and also what his indicators said. After the correction he thinks the trends will go on.

  3. Some success. This week [I]my open-closed positions had a 20-0 win rate![/I] The currently [I]open positions have a 8-4 winning rate[/I], from those 4 losing are 2 problematic, the 2 USD/JPY longs. I opened in this moment 3 trades, AUD/USD and NZD/USD shorts for short-term here I am in negative but only because of the spread. The HUF trades finally gained something today, but are still in huge minus.

See you guys later, probably tomorrow!

282

Hi guys,

it might be strange to post here a babypips.com article, but I am not sure if you guys read it always and I find it very informative.

It comes back to petermaā€™s and Mikeā€™s intermarket analysis, but rookie was also writing about commodities in his weekly analysis.

Here you can see positive and negative correlations, charts, forecasts and some other valuable infos:

A Beautiful FX Risk Aversion Trade ā€“ If? | Forex Blog: Currency Currents

283

Correlation is a strange thing, it fluctuates almost like the tide.

MRCI are brilliant at market stats, they keep a correlation table which I used to always read avidly.

One thing I found about stats - they live in the past, the market lives in the present and the future.

FE is right about Iraq, in the past there would have been a massive move to risk off on such news, so what about today?

Gold, after a little hesitation at NY Open, continued to fall, the S&P continued to rise, it is Friday and positions need to be closed, profits taken.

Monday next may be a different scenario.

I know it sounds cynical, but we are in a market and thatā€™s how things work out.

IMO correlations are good, not for seeking market entries or in which way to trade, they are good for keeping me out of bad trades (like a short on the Aussie last night.)

MRCIā€™s Inter-Market Correlations

284

Most guys like to post charts showing the brilliant trade they just made, or even maybe mention bagging x number of pips.

Let me show you how easy it is that I lost pips.

My day trading involves most often Cable, though sometimes Fibre also, Eur/Gbp is my work.

There are some advices I generally follow, first I dislike buying Cable on Fridays, secondly I like to follow ā€˜momentumā€™ in a news absence day, I generally use the Asian session as a momentum indicator in such circumstance, the Asian being lower than yesterday makes me look to the downside.

Then there is the banks, from the cot I try to see their outlook, will they buy, or just stay out (often they donā€™t switch sides quickly)

So with cable today at London Open, all the boxes ticked to the downside.

But this is real life, the more you read the more you get swayed, and in truth I cannot believe how it was that whatever I read this morning I set a buy order on cable - somewhere in my retailer mind I saw cable had been falling and thought ā€œthis HAS to go upā€ - (ref the Monte Carlo fallacy, google it).

It so happens that on cable I often use the mid level between the Asian Hi/Lo for an entry during London Open, so the chart below shows that Asian (dotted lines), the rest are computer generated with the exception of the hard yellow line just above 6815, i.e. the above mid point.

Break of that yellow line to the upside is where I went long :slight_smile:

Thankfully, the good angel must have been on the other shoulder and told me to set the SL at 10 pips.

285

Hi peterma,

It was not profit taking yesterday for stocks and not because positions need to be closed. I am working on the answer, at least on what I think is the answer.

Your correlation table is great, I think Mike will have a new hobby with it! :slight_smile:

286

Hi peterma,

these are exactly the posts I like to read. This is your opinion but not so ā€œconservative blablaā€ like many people do without real content. I like to read your own suggestions how you trade ā€œyour pairā€, like Asian momentum etc.

What I did not understand linguistically 100% though is you donā€™t like buying Cable on Fridays. Does this mean that you do not trade this pair or you only go short on GBP?

I only do not agree with with one part of your article. I do not want to make you angry, but still write my opinion on it. It is about your first sentence: ā€œMost guys like to post charts showing the brilliant trade they just made, or even maybe mention bagging x number of pips.ā€ Well, I did mention yesterday my wins this week, at the end of the week it was 22-0. I am not sure if you read that post and that is why you wrote your sentence or it was an accident that they occured at the same time. I learned something on babypips blogs from Dr. Pipslow that I find very very important. He writes that we also have to celebrate our wins because without that we get frustrated. For a while I was only always thinking about my losers and what I do wrong. But Dr Pipslow is right. That is not the way it should be. We should also share our wins. Last week was the best for me altogether since I trade. If you check the thread we all did not have the best weeks lately so a bit of success was good to see in my opinion. On one side I think you are right that no one should say he/she is the best because that is horrible. If we are only negative though, it does not help us too. I am also happy to read if for rookie, for Mike, for you or for any other traders it is going great. We work together and try to beat the most competitive market. On the other side celebration can also be limiting risk and only losing 10 pips like you did. It was a losing trade but we can look at it as a winner. You made a mistake going against your analysis and bias but corrected it very fast and it did not hurt you basically at all. I rather not write in how many minus pips I was two days ago with HUF long trades and it still does not look the best but is already significantly better.

I would suggest to let us celebrate the vitories as well and do not only get upset about the losses which we also share.

287

Peterma, rokie, Mike: your opinion is asked!

Well it is Saturday morning. People do some free time activity, sleep or do something but for sure do not work. I am an exception as I enjoy this thread a lot and see great progress! Sometimes I even feel like we are going with too much speed, making too large steps, without mastering one step we are already on the next. What is this ā€œHeeelpā€ title? Well you will understand soon. I plan to do such trades which are not normal. I also make this post unporpuse before analyzing the COT data, because I do not want to influence myself with it.

It is said: ā€œDo not give up your trading plan!ā€, ā€œHave patience and discipline!ā€ ā€œDo not get greedy!ā€. Well guys I do see the potential now to give up all the learned things as I do see such setups where the reward/risk ratio so good is that I might just jump into it. I plan these trades only with market sentiment analysis.

So what is this all about? Yesterday was the Air strike on Iraq. However what had a lot greater affect on the markets is somehow ā€œhiddenā€ or not shown too much on the main sites. I do not get this but that is how it is! Look at the main headlines about politics, economics and financial world. Somehow it is not a man title that Russia wants to back up from Ukraine. Who understands that? It made huge moves in the markets yesterday already and I got the news only today!!! Look at the stock or emerging market currencies! What a huge sentiment change just in a couple of hours. I want to follow the news on the weekend and if I find appropriate, I do not want to be left out of this! Markets cheer Russiaā€™s Ukraine exit | Video | Reuters.com That is also the reason why I write down the issues now, so we have almost 2 days to think about it!

So letā€™s see what I plan to do and which trades do I want to enter:

[B]1. Short-term trades: USD/JPY long and USD/CHF long.[/B]

If you read carefully, you will see I plan to go long and short with USD at the same time. We know that USD, JPY and CHF are the safe haven currencies. They still have to lose/gain vs. each other. As I see JPY and CHF gains normally vs. USD. So I think as the fear is over I can go long with the USD. I wanted to go long with other currencies vs. JPY and CHF but I just do not see any strength. GBP is just extremely weak, commodities too. The only short term possibility was EUR (which is also weak but still for short term would have been ok), but as I see I already missed this move. USD lost some value vs. JPY and CHF too and I do think there is a potential to make some pips here as risk off sentiment is off.

Now come the short USD trades, the wild part of the post where I really need your opinion. I will probably enter markets where I am not very involved with the news.

[B]2. Short- to medium-term trades: USD/HUF short, USD/CZK short, USD/PLN short, USD/TRY short and USD/MXN short.[/B]

There currencies are developing country currencies from Eastern Europe where the Russian-Ukraine had a huge effect on the currencies. Turkey and Mexico are also developing countries, losing values on geopolitical risk. The Russian Ruble would also fit here but I am not comfortable to trade it in this environment. So the plan is that all these currencies lost huge values on geopolitical risks, just like stocks. Yesterday after the news, they all had huge gains but there is still plenty pips to make. How much? That is the risk of course. Since I am not familiar with these pairs, I cannot say now. But the charts speak for themselves as I clicked through all of them. I was thinking about these setups and then checked the charts. What is also good to see what carry trade we might win (MXN, PLN, TRY), being on even/winning a little (HUF) or even lose a bit (CZK). PLN might be a bit riskier than others as their economy loses the most because of the Russian sanctions on Europe. So they might still gain because of economic risks, but it can be limited because of the economic situation. I just see very rarely such a great setup to enter developing currencies with good carry trade on such levels and I feel that fundamentals are on my side at the moment.

As I plan to trade long USD trade in the 1. point and I plan to go short with it in point 2. Why? Developing currencies usually can only be traded vs. USD or against the EUR. They both act as safe havens, but I think USD has more of this role. So in these trades I go against the USD.

You can ask if I see risk on sentiment why donā€™t I just trade NZD, AUD or CAD? They all have less spreads and we know these currencies more. Yes, that is true, but I see weakness in all three currencies. Developing economies lost value not because they are weak but only because of risk off sentiment (especially in Eastern Europe). This makes me think they provide a better trade possibility.

Well guys, here we go! These are my setups without the COT report (which I of course will still post). I think I have to go with these plans. If you open your charts on Sunday night, Monday morning take a quick look at these exotic currencies and think about FE, who has entered all these to make some hundreds of pips. So why is your opinion asked? Although I am concerned about these trades but I do like to read and listen the opinions of others about markets and currencies where I never had a trade before. You might give me some insider information I did not know.

PS: What can invalidate my trades? Well, we know about weekend gap risk. I can imagine that the mentioned pairs do jump huge in ā€œmy directionā€ and there will be no room left to trade. That would be a pitty.

288

Nah FE, wasnā€™t think of you at all, wasnā€™t even thinking of this forum, I was just thinking out loud how it is human nature to show how a trade went well but we dislike to talk about where we went wrong.

I was cross at myself and in a sense showing that despite having a very clear route map laid out for a sell I went the opposite way - for no apparent reason.

My intention of posting a negative result was two-fold, first to reinforce my mind not to do silly things but stick to my plan, make it almost a subconscious thing, and secondly in the hope that someone reading may learn from my mistake.

You know I was thinking about that today, I said to myself (I know, probably the first signs of madness by talking to myself), ā€œyou know Peter, it is hard work, long hours of learning and reading, all in attempt to get right side of the market - and yet so little effort needed to go wrong sideā€.

289

I just love the last sentence. For ā€œsome reasonā€ it is familiar for me :slight_smile: As I wrote I think it was a great example with the chart, not even the most important how the trade ended up but to see your way of thinking and analysing it.

290

On the risk on/off and current news. I just read a headline on forexlive where it was suggested that the Euro is on the ā€œcomeback trail as geopolitical risks waneā€.

Maybe I am just too cynical, but I cannot see any huge risk change for the better.

I am always suspicious of ā€˜risk aversionā€™ on Fridays, especially leading up to the close. The biggest risk factor for a trader during the close is a sentiment change during that period, not usually on economic news but more often on geo political news over the weekend.

A reasonable current synopsis of risk news here:

BBC - Search results for Russia

291

[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]

[B]Trading Stock[/B]

[B]Test of Metal[/B]
The net position in the metal markets do test the mettle of the COT Index.

[I]Summary:[/I] Well, as you see there was not much to write about. Most of the two chapters were about tables. In the Trading Stock chapter there are examples when the COT Report told in advance the main bearish and bullish moves in the stock market. I think it is great to show the strength of the COT report. Catching those moves could make some a multi-pipionaire. The metal part was intersting and suprising. I like how honostly Briese wrote that COT is sometimes very tough to use with metals. This can be a very valuable information for us! There is also an example with a chart when the COT Index gave continuously not valid signals in the Copper market.

He wrote something very useful in this chapter. The reason I write it in the summary and not in the chapter as I think it can be used for any systems not only for COT and it does not belong only to this chapter:

ā€œThere is no trading methodology I know of that does not at one time or another go bonkers. The probability of this is most likely higher under unusual market conditions. This is what makes black box computer-generated signals so dangerous. To protect yourself and your account from a string of ruinous losses, you need to know your system well enough to know when it is not working.ā€

292

Hi guys!

Yep, itā€™s the weekend. My favorite time now. Like you FE, I spend many hours researching, tallying numbers for the week. I wake up at 3am everyday (couple of hours before work on weekdays), and then comes weekends (which I have no work, then that gives me around 5 hrs or so satā€™s and sunā€™s). Iā€™ve been doing this for around 14 months now. Heyā€¦there just isnā€™t enough hours in a day for what I want to do. So I make the hours. Right?

I just finished up tallying the weekly figures, my trading stats, notes on what happened and notes for the week now. And now is when I can talk to you guys for a bit. What good posts from Peterma, and you FE. Want to respond, and I will, but first want to get this part 1 summary out of the way. Tomorrow Iā€™ll give you guys my thoughts on the coming week.

Weekly results:

JPY: strongest
GBP:
AUD:
USD:
CHF:
NZD:
EUR:
CAD: weakest

Major/Comm splitā€“Majors edged out Comms +6. Once again they took both last days. That will take the Majors 3 weeks in a row over the Comms. What took the Majors up on the last day was the EUR and CHF. They were the strongest on fri. Then with JPY next strongest. Back on Thurs. it was USD and JPY on top. So, that explains the reasons. Also the Comms are very weak, with CAD dropping a whole lot on fri.

Thatā€™s the summary in total. We all know that there are other market forces acting. FE, thanks for cluing us all in on that stuff.

I got to do some reading up on that.
Iā€™ll be in touch with you guys this weekend.

Mike

293

Excellent! Thanks for sharing, this is great insight.
Knowing when itā€™s not working is half the battle; the other half is applying this knowledge and not forcing positions. Patience is indeed a virtue.

Jake

294

Wowā€¦what a site. Thanks Peter for that, MRCI online.
Thereā€™s definitely not enough hours in a day. I can get lost in that site. Thinking about joining. Not crazy about paying though.

295

Mike, they are great at stats, useful if you follow seasonal tendencies.

I was reviewing their seasonal forex strategies the other day, I was surprised with the result. They provide an entry and exit date and show a win rate out of the previous 15 years.

In this past year, from April I was checking not the win rate but how often the entry direction was correct and whether it provided over 50 pips in that direction - result was 15 yes and one no.

But I have never followed those tendencies, Iā€™ll post for the future:

Sell Aussie , entry Aug 03, exit Aug 27

Sell GBP Aug 04, exit Sep 8

Sell GBP Aug 05, exit Aug 26

Sell CHF Aug 06, exit Aug 26

Buy JPY Aug 07, exit Aug 21

Buy JPY Aug 07, exit Sep 09

Buy CAD Aug Aug 11, exit Sep 28

Buy JPY Aug 25 exit Sep 03

So it will be interesting to see how those get on :slight_smile:

296

Hi peterma,

EUR comeback??? Hahahahaā€¦ what a great joke! Mostly we might see in my opinion a 100-150 correction. But why would a comeback occur? Bad economic reports, conflicts at the Euro borders, sanctions against the Eurozone etc. There are no signs for a comeback at all in my opinion. So we have the same opinion on this.

I see your point on geopolitical issues and looked at the attached link. What is your bias then? Do you think it was only a temporary strength for the currencies of developing countries and stocks?

297

Hi Mike,

yes, I was also figuring lately that you have a ā€œfunny time scheduleā€ because you are in the US, 6 hours behind me but I think we go to sleep and get up about the same time :slight_smile:

But as you see, on the weekend here are more of us who is working almost full-time and progress some work to get ready for next week. The thread got likes from people who do not post and I did not know about them until now. It is great to know that there are people out there reading the thread and find some information useful even if they do not post! Everyone is welcome, passive (reader) or active (author) too.

As we come further and further on the issue we will be more and more.

Question to you: did you take out from your Majors vs. Comms calculation the scores when Majors vs. Majors and Comms vs. Comms pairs were? That would be great.

Can you post tomorrow (with your thoughts together) the Majors vs. Comms weekly stand? I like that trend. If I remember right, we havenā€™t seen in the comparison a 4 week winning streak. Of course we cannot trade based on that but it is a signal for a Comms week. However that would be a surprise for me, looking at Comms strength lately.

I also post my COT findings sometime tomorrow, although I posted my trade plans already. Today posting took me 3-4 hours, that is why I am a bit late with the COT but I found the shared information important.

I am waiting for the summary, your thoughts on my idea and your trading setups. Also you can write about pairs where you changed your mind (because the trend changed).

See you tomorrow

298

Hi peterma,

do you pay for that information or do you have a link? Are these always the USD pairs? What I do not get, how can they say exactly when is it happening in the future? I mean no one knows the news are we have to look at the charts, geo risk etc. And at which time is the entry? With a bit more info I can give it a shot and give you guys live feedback.

Looks interesting
PS: I looked now on the site but did not find the link where the strategies and trades are written. Please post it.

299

I hope you can accept what I see will be constructive criticism. I too have been following the COT report with a focus on commercials. I think that the system I have followed for tracking their market sentiment is quite elaborate, its just that my technical analysis and trading technique is very poor (something Iā€™m changing).

The key with commercials is to think of them as actual traders or producers in a market and not speculators. Letā€™s say you have a store that sells cheese for example. If the price of Cheese goes higher you will look to SELL MORE cheese. However large speculators of cheese prices will actually BUY more cheese contracts. That is the reason for the contrast you saw in the position. In fact, you should always find that contrast.

You just need to remember that a negative net position for commercials means the currency is BULLISH while a positive one is bearish.

So how do we make use of it? I think it is great for determining tops, bottoms and reversals. Commercials buy more as prices decrease (think of it as if they are waiting for a bounce or a bullish reversal to sell for a profit). Our only way for matching them is wait till the buying level or selling level is at an extreme. Once the buying reaches an extreme we wait for them to buy LESS (since they are buying less, it means that the price is going up and they donā€™t see it as a bargain as before). When they start buying less we wait for a technical buy signal and now we are in tune with the commercials. I hope this makes sense.

I do create a detailed spreadsheet every week that details the commercials activity, where it is relatively to their previous activity. I also work in formulaā€™s that tell us if a price is at a bottom or a top. Iā€™m happy to share that spreadsheet every week if we can try to develop it all together and may be share trading ideas based on our efforts.

I will upload the spreadsheet when I get home but what I do remember is that all of EUR, CHF and JPY are at extreme buying levels (meaning they are very cheap) and so a buying opportunity is near. I also remember that based on my formulas the GBP should be seeing a reversal and not a correction. So the long term trade should be the sell. I also remember that despite its recent rise, Gold remains at a bottom and this has been the case since June.

300

ForExchange,

:slight_smile: Sometime the FX market behaves irrationally and moves contrary to the current prevailing news. So donā€™t bet the whole farm on a weaker EUR.

A lesson from historyā€¦ After the markets closed on Friday Jan. 13th 2012, Standard & Poorā€™s announced it was downgrading Franceā€™s AAA bond rating. Over the weekend the assumption was the EUR would open on Monday and crash & burn.

Friday EU had closed around 1.2650. Monday EU bounced down and off the 1.2625 level, and then for the next six weeks rallied up +800 pips to the 1.3480 level.

Some of the biggest movers of the FX markets are multi-national corporations. When prices get down to ā€œbargainā€ levels the multi-nationals start to step in as big buyers and can quickly turn the whole thing up side down.

A quick look at the weekly EU chart suggests the 1.3350-ish ā€œmightā€ be seen as a bargain area, but only time will tell.

PS Warren Buffetā€™s advice, ā€œbuy when there is blood on the street!ā€ :wink: