COT Report Analysis - a thread on market sentiment

Trading Discussion News and Economy
361

Hey guys!

Wow…well, I’m so lucky. Concerning the GBP/USD. I was looking at them between 430am - 530am (0830 -0930 GMT). Lost a bit (10 pips) on the first news that came out. They dropped, then it started to go back up shortly. So, I kept watching. Then I got in with them going south, this was shortly before the bottom of the hour news event. I didn’t realize what time it was. So as I’m watching…the price just shot so high up in seconds. (Peter…I know what your talking about). It was so quick and I’m sitting there with my mouth open. Still in the trade. THEN…it just nose dived. Then my heart just started to pound. Man…I go from losing quite a bit to winning a whole lot. I had more than normal size on that. (scalping I go 10k lots). That was just such a rush. From real bad to real good!! But the thing that got me was I forgot about the second news appointment. It was just so unexpected. And there I am watching this unravel before my eyes. Then it hit me about what’s going on. So, it seems like if I was aware of what was gonna happen, then I probably would’ve jumped out, when it shot up like a firework. (I think). But because of my ignorance, I made out really good. I took 27 pips profit out of that (with 10k on it). Then I got back in going short again with only 1k, and that’s for a longer term now. Cause that will make the USD trending high against the GBP. So, I’m in now with that pair at 1.67578 going short with a stop loss at 1.67628, 1k on it.

And that’s my story.

Mike

362

Hi Mike!

I am happy for you! Sometimes we need to have luck there!

In the morning we made money with weak GBP news. Well I try to make money with some retracement of the weak USD news now! NZD, AUD, EUR and CHF are my targets as I surf the charts. GBP lost so much I feel there is hardly anything to get today.

And it seems like Forex Gump just read our questions and post right away an article for us:
The Japanese Yen Tug-o-War | Forex Blog: Piponomics

Good trading guys!

363

[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]Bean Counting[/B]

In terms of markets positively correlated with the grain and soy complex, wheat and soybean oil each have more than 250 issues that are 75% correlated. Although soybeans are 80% correlated to wheat, soybeans have very few other correlations, which seems strange when soybean oil is near the top of the soybean list, too. Soybean, meal, corn, and oats also show almost no high correlations. Corn is at the top of the wheat list, and yet has almost no other strong correlations. Strange - and a reminder to do your own homework. There are very few duplicates between wheat and soybean oil.

[B]Moonlighting[/B]

There are three viable livestock futures markets: feeder cattle, live cattle, and lean hogs. The open interest in pork bellies is so marginal that it is reported only sporadically in the COT report (due to the minimum 20 large traders requirement). Small traders are a bigger factor in these markets, especially with feeder cattle, than in most other futures market. This, plus the short trading cycles and the unusual seasonals affecting various individual delivery periods, make for some interesting moves. Quite often the COT data provides advance warning of imminent trend changes.

The hog-corn ratio is used to predict future hog production, normally with a 12- to 24-month lag. The theory originated with the family farm, where relatively low corn price relative to hogs would cause the farmer to feed the corn to pigs. A high corn price would, on the other hand, limit pig production.
[I]→ personally I found it difficult to interpret the COT report in this market[/I]

[I]Summary:[/I]
As you see there were not much to write down again. I found though a part that I definitely want to share with you, it was in the Bean Counting Chapter but as it can be used in any markets I thought I will post it in the summary:

[I]Market analysts usually find a way to be right. Fundamentalists (who look at things like earning reports, balance sheets, supply and demand, crop conditions, the rain in Spain, and so on) are never wrong. They are often “early”, or the market does not “recognize” the (potential or risk), or sometimes the market is just confused. Elliott wave practitioners have perhaps the best fallback: the "alternate count."Mine, I picked up from Jack Schwager’s A Complete Guide to the Futures Markets, wherein he identified:[/I]

[B][I]“The Most Important Rule in Chart Analysis
A failed signal is among the most reliable off all chart signals. When a market fails to follow through in the direction of a chart signal, it very strongly suggests the possibility of a significant move in the opposite direction (Schwager 1984, p. 396).”

“The novice trader will ignore failed signal, riding his position into a large loss while hoping for the best. The more experienced trader, having learned the importance of money management, will exit quickly once it is apparent that he has made a bad trade. However, the very skilled trader will be able to do a 180-degree turn, reversing his position at a loss if market behavior points to such a course of action. In other words, it takes great discipline to capitalize on failed signals, but such flexibility is essential to the effective synthesis of chart analysis and trading (Schwager 1984, p. 398)”[/I][/B]

364

Hi guys,

I do not know if eveyone jumped in the above mentioned trades.

They worked out quite well:
EUR/USD: +37 pips (closed)
USD/CHF: +32 pips (closed)

NZD/USD and AUD/USD are heading to target but they move slower.

Good luck guys!

365

Hi peterma,

I copy+paste here what I have written about Cable from a book. Can you please say what you think about these and if you have something else on it? (for everyone else it might make sense to write these stuff down!):

[I][B]GBP/USD (the cable)[/B][/I]
The pair is prone to sharp price movements and seemingly chaotic price action.

“The cable trader makes the most money and loses the most money.”

EUR/GBP cross is one of the most important trade-driven cross rates.

Spread is 3 to 5 pips compared to 2 to 3 pips in EUR/USD and USD/JPY.

EUR/USD frequently gets bogged down in tremendous two-way liquidity, cable exhibits much more abrupt volatility and more extreme overall price movements. If U.S. economic news disappoints, for instance, both sterling and EUR/USD will move higher. But if EUR/USD sees a 60-point rally on that day, cable may see a 100+ point rally.

Cable tends to display more explosive reactions to unexpected UK/news than EUR/USD does to similar Eurozone news/data.

It will remain highly directional and tend to see minimal pullbacks or backing and filling after news or data move the market.

It is a leading indicator for EUR/USD.

False breaks of technical levels occur frequently.

Cable’s higher volatility also argue for overall smaller position sizes.

You can take advantage of cable’s tendency to overshoot or make false breaks of technical levels by placing your limit order behind technical levels (up to 30 pips).

366

Wow FE!

Man, that’s good stuff to know. It’s the correlation thing again, about GBP, EUR, and USD.
We need Peter to confirm some of that. (I would feel better)
I want to write every one of those statements down.

Good job FE!!

Mike

367

I do business across the only land border that exists between the Euro and GBP. I use this cross in my work.
I have never traded it, although the broker does offer 1.5 pips spread.

IMO it is possible to trade cable using only UK data, it reacts clinically, usually without the spikes except on big days like today.

IMO the reason is simple, UK data releases are usually at London Open, that particular hub has little difficulty in moving GBP and that is their time for making the opening orders.

Today and this week they made it awkward by pulling price up, in reality it was inconceivable that there would have been upward pressure on wages, most traders knew that, so when price started to rise…

Many people place tight stops on news days, so those were taken and then the market left without them.

One tactic to counter these antics by the banks is to enter at market with tight stop as usual, get stopped out, stay with it and let it rise, repeat again, and then again a third time.

You can only do this if, like today, a big move is expected - all they have left to get the remaining stops is the spike, they have only seconds to do it.

Some pro traders set their sell limit up at 6850 - never got hit, the spikes are always controlled.

Again, maybe I’m cynical, but if you look at cable and Eur/Usd on Monday and Tuesday and see the divergence. Were the banks really expecting upward data and thus raising cable?

Sorry, I’m off on a rant:)

Eur/Gbp is a good indicator for unexplained moves in Eur/Usd or Gbp/Usd - it will tell which currency is being bought or sold, easy to watch live during London session.

Cable does indeed explode on bad UK news - thus the reason re the tight stop pre news.

Yes, re the directional, it becomes reliable.

Leading Eur/Usd - during London, maybe because only the Asian and London traders awake and active, US guys still snoozing.

False breakouts and TA? - don’t know, only use weekly pivots and it respects those with a reasonable degree, e.g. today broke down thru s1 at 6733, came back up to have a look from underneath, said no, and went on down to s2 at 6687.

Apparently there were buy orders at 6730, of which I have no doubt - you could see that little battle happening live.

368

Just a little note on correlation on the Euro and GBP vs USD.

The economics are the driver, UK is part Of EU and the EU is a massive market for UK, it’s fortunes can become the UK’s fortunes.

The EU is an open market, there are no tariffs or duties between the two, indeed I cannot ‘export’ to the EU nor can I ‘import’ from there I can only have ‘acquisitions or despatches’, the only recording needed is for Intrastat.

They have even banned good old ‘duty free’ at the airports for travel anywhere between 2 EU countries, including UK and Euro Zone.

369

Hi peterma,

thanks for the long and good answer. Can you please explain one part of your post with other expression or an example? It is not clear for me. I do not really understand it, I guess it is the language there that gives me difficulties:

"One tactic to counter these antics by the banks is to enter at market with tight stop as usual, get stopped out, stay with it and let it rise, repeat again, and then again a third time.

You can only do this if, like today, a big move is expected - all they have left to get the remaining stops is the spike, they have only seconds to do it."

Especially the first sentence seems to be very important so I would like to understand it. This “stopped out, let it rise and then the third time”… Hmm… I try to understand but don’t get it.

Thanks a lot!

370

I do not like recounting a ‘success’ as I do not want it to seem as if I’m boasting.

The difficulty in getting short is how to minimize the risk (as usual), so it becomes a battle against those who can dictate price only before the data release.
After the release they have lost their power (well at least for a while I suppose).

I’d say in all the comments I’ve read tonight Ryan Littlestone’s blog, obviously written before the release, sums up the market’s view of the impending numbers.

If a trader anticipates a sizeable move south, sets his order higher up say at 6850, very frustrating not getting hit.
Equally frustrating to enter with a sell stop just below the number, so at 6796, it is news so the books say keep your stop tight, out you go - even with a stop of 50 - and of course you were right all along.

So another way is a sell stop well down - that would have worked ok today.

And another way is staying in with tight stop (pre - news) as you are stopped out you stay with it, as price rises you go in again, and a third time.

Entry 1 yesterday evening, short below the weekly pp at 6809 - may go down from here in NY or Asian, stopped above weekly PP later at 6817

Entry 2 (this morning) short below weekly pp at 6809 (price may just move on down directly from here)

Stopped out above Asian high and weekly pp at 6815

Entry 3, price is now much more active so have to watch closely and use daily pivots (GMT)
Price reaches R1, 6830 and hesitates, down to 6820, back up to the pivot, then back to 6820.

Waiting for the break of the weekly pivot, suddenly does that- now getting too close to data release so now only the spike to worry about, well now is the time to have the courage of my convictions on the data, put the stop beyond an obvious place where there would be sell limits waiting - thus at 6855

The spike, in my thinking, is the last piece in the banks’ arsenal, and they do not like to give the guys who placed their sells up high and safe any of the spoils.

Now, it is not a nice feeling when you finally went short for the third time and you see 13pips gain almost immediately, and then suddenly the screen turns red, and the pips are disappearing faster than a snowball in a volcano.

I was within 10 pips of being caught, so I was lucky.

BOe inflation report preview 12 August 2014 | ForexLive

371

Look at that guys! Does not happen very often to have an article here on COT!!!

CFTC COT Forex Positioning Update – Aug 5th, 2014 | Forex Blog: Espipionage

And you guys believe it or not, but all the issues covered in the article have been already discussed here. Peterma is a conservative person when it comes to celebration, which is good, but I am still proud of all of you for the great work!

And now [B]I read the end of the article, Espipionage mentiones our thread with a link!!![/B] (and writes my name false but it is, ok, I write him that to correct)

372

Hi peterma,

this post was just awesome!!!

And gave a quite good round up of trading the news. Of course such a strategy only works if you have a very strong bias what will happen. Because getting in 3 times, getting stopped out twice, well it costs already many pips. And the problem is, as you wrote your view, you have a very short time to analyse. It is something like an instinct. It has to be very quick to go short on the spike. Well that is definitely hard to do.

I have a bit my own strategy based on my experience. My strategy is similar, I have a strong bias, but without a stop loss. What do you think of that? My experience is that these first reaction might go down, enter my sell stop, then high again, hit my stop loss and then go very down. Similar what you wrote. Only that I do not ride down the road… I take the loss when it goes up but do not enjoy the huge profit. So lately I only trade news where I have a clear bias. Today I had one and thought I make a sell stop or if it goes up I short on the first occasion where I find it right. I just did not place the order (I never do) on 6850 (or any given level) as in my opinion the first reaction can shoot higher. Why should I go short at 6850 when I might get in at 6880?

What is your opinion? Generally I like stop losses but with news trading it worked out only bad for me with stops.

373

Yeah, there were apparently quite a few sells stacked up at 6850, 6880 and 6900.

Maybe that’s why cable gets a bad name, the banks (I am def not anti banks btw) can see those orders, at the very least anticipate them, maybe not our little orders, but we are thinking like the funds and so imitate them - so our little orders are similar to the funds’ orders.

(Funds are on the speculator side of cot, for those reading.)

You are correct about the stop, although with cable they can take it the wrong way right to New York Open - now that takes a certain courage, but we have seen it done a number of times on this site.

374

Hi everyone,

I “had nothing to do” in the afternoon so I thought I fulfill the wish of rookie and Philip. I made an excel sheet back to the start when I started to download COT reports (it was in May 2014, a couple of weeks earlier when I first thought about starting a thread on it).

Actually it is possible to do the analysis further back in history, but I once downloaded an old COT report; ohhh Lord that was raw numbers only! With that I cannot do much. It takes forever to get the right numbers out of it. I can suggest to everyone to download and save COT reports every single week.

So the following table shows the net position of non-commercials starting in May. Now you might ask why do we need this table when the facts can be found on the Forex COT | Commitments of Traders Report | COT FX | OANDA fxTrade Canada website for example?

It has a couple of advantages. I can make my own COT index (price is not included yet) and on the different sites you can read/see the data but cannot download it. Now I have the data and can use it for any excel sheet, correlations etc. One advantage is to have altogether all currencies which makes it easy to compare them and see correlations. This chart will be updated and help to find COT extremes for non-commercials.

I marked with red the minimum value and with green the maximum value. Based on this chart we can definitely not make any trades. The sample size is way too small. As I have written, for such purpose is mostly used 3 years of data, I have 3 months at the moment. For many currencies if you take a look the first and last weeks are the extremes as prices trend in one direction.

Still I compared price action today for some of the currencies when there was a large COT difference and it was very interesting to observe these changes on the price charts. I do believe that as the chart gets larger and “older” we will have better and better signals.

Now we only need some other volunteers to make these charts for the other markets (agricultural, stocks etc.) and maybe for commercials.

As we have rookie and Philip on the commercial side facing vs. me on the non-commercial side, I tried to even up the battle between us with this work :slight_smile:

Good night to everyone

non-commercial net positions.jpg700×265 48 KB

375

Thanks for a great effort there FE.
The two things that caught my eye were the EUR and CAD. On May 13 non-commercials went from Bullish to bearish on EUR. Shorting based on that info alone without even using technical analysis would have made us 330 pips in EURUSD alone, let alone other currency pairs.
Yet that shift did not seem to work with CAD, where the strongest run came when non-comms were becoming less short. I’m interested to know your views on that. In fact CAD’s strongest run was as non-comms were less bearish rather than when they were bullish.
One takeaway that I have from this spreadsheet however is that the COT index will be an invaluable tool for us as it will help us look for that shift in sentiment before it occurs.
You have already highlighted JPY, EUR, GBP, CHF at their minimum value. Coupling that with a COT index would help us filter which of those currencies are primed for a reversal (in my report GBP has already began its reversal weeks ago, you would have made 450 pips in Cable based on that info alone.)

376

Hey guys…

Here is what Wednesday looked like.

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

Comms of course took it. But by very much. +14. That is the biggest spread since mid March. That was from the Comms also then. And just so you know, +15 is the highest possible spread. And the Comms did that twice in the beginning of Feb. They did it a total of 3 times this year. Majors only did it once. So, what were we saying. Majors were on a roll possibly? Well, this day proved that that’s not the case. NZD showed up, which began during the Asian session for Wed. and continued throughout the day. GBP crashed.

Ok guys.

Bedtime.

Mike

377

Hey guys…

Good observation Philip! But what matters is after that change in net position how long did it take for market to react accordingly. I doubt we’ll see any obvious price action change right after the sudden drop or increase /bullish to bearish and vice versa/. But then again the volume has an important place.

It would great FE if you could calculate COT index for non commercials, like you said oanda has a great coverage on non commercials, we can go back as far as 3 years by using their data if you have got time of course :slight_smile:

378

We can go back until the beginning of COT report with this site

COT data net positions for commercials, non-commercials and non-reportables

379

Hi Philip, rookie and Mike,

well it seems like the US Department gives me enough work and questions every morning I wake up. I come to the computer and wonder what is waiting for me :slight_smile: But it is good like that!

The observations are good, EUR is logical. Well the CAD… that is a tough one where I can share my view but hard to say more about it. I personally think the toughtest to have a view on JPY and CAD currently. I think the market players might be uncertain as well with CAD. From mid Marc until the beginning of July it gained 600 pips vs. USD. I made some good trades and thought the rally will go on. Well it did not. As always it might help to look at the CAD in perspective with other commodity currencies in this risk off environment. What is interesting, looking at the daily chart vs. USD all three currencies show a different picture:

  1. AUD is losing vs. USD slowly but steady
  2. NZD is just crashed
  3. CAD was losing 1 month long quite a lot but shows strength and beats USD in the last 4 days.

Not considering for a moment the risk off sentiment, I do see though a big difference between CAD and AUD with NZD. On my opinion although CAD lost value its economy is not performing that bad and as US rises so should CAD. On the other side AUD and NZD economies do have difficulties and we should not forget that many forecasts say that it will not go so great for China in the future what is also not so good for the Asian countries. That is how I see it, but as I said I find this a tough problem.

rookie, you are funny with your 3 years idea…:slight_smile:

380

Hi Mike,

it is good to see your stats because we were talking about it on the weekend if we see the Majors to break a 4 winning streak or we see them stop by the “usual” 3 wins. I did think this is the perfect week to make a home run but it seems like it is tough to win 4 times in a row. I think Comms have a huge advantage in your ranking after 2 days, but it does not change my point of view for the big picture. I think GBP will have a hard time in the upcoming weeks/months.

Have a nice day