Hey Everyone,
I’ve just started my Forex journey a little under two weeks ago. I’ve been demoing ever since, making classic beginner mistakes, but learning from them. I’ve completed the school of pipsology, but I continue to review it to let the points sink in. It’s an excellent resource.
Regarding the section of reading COT reports: the sample chart in the highlights two extreme area of longs. My questions is how does one know these are in fact areas of longs, and thus an indication of sell-off pending? That is the number of contracts could always continue to rise, and what one thought to be an extreme, may perhaps be a seconding peak in an otherwise still rising number of long contracts.
My first guess is it’s relative to the extreme longs of the past, but market volatility might not allow the past to repeat itself.
I love the COT reports and I’ll tell you how I use them.
1st off, I look at the non-commericial positions (aka speculative positions) and then I take the ratio between the #long contracts to the #short contracts.
So let’s say there are 50,000 long contracts against 25,000 short contracts, I’ll have a 2:1 long:short ratio.
I don’t trade off these ratios alone, please read that part twice!
I will take it as a [B]market bias[/B]. When speculative interest starts favoring long/short over the other by ratios above 3-5 (depends on the currency in question) I’ll treat that speculation like a freight train. I’ll assume they are in control but will also be looking for where they may run into trouble, or where they might be getting a bit too ****y, and these bits of information you can capitalize on. But only if you are diligent about matching it up with price action.
Also, getting deeper into the COT, you can look at individual long positions/short positions. You can see if they are adding to positions or taking them off the table. For ex. if I see long contracts and short contracts being piled on, I can guess that there is a marked struggle between the 2 camps and potentially look for some kind of breakout.
There are many ways to match COT clues up with price action support/resistance levels, but it takes a keen eye and some practice of course. Also they genereally only useful on daily or higher charts, maybe 4H to some extent, simply because the reports come out weekly and are 3 days delayed.
This is awesome. Thanks for the response. I just checked, and the number of long positions has exceeded its 6 month high. Add that to the fact that the EURUSD is showing a bullish divergence in the stochastics on the daily chart, and the ratio of longs to shorts is around 11, would be be seeing a change in trend soon…
The EUR/USD has been in a very aggressive downtrend since early December
The current number of long contracts held is 31,207 , shorts is 74948.
That means shorts are outnumbering longs 2.40 to 1. And for the EUR/USD pair that is quite extreme.
Trading counter-trend is sometimes the right thing to do, but to say that the longs are in control on the Euro is false, wrong, 100% incorrect. Sorry man, hope you learn how to use the reports soon
I went to timingcharts.com - Commodity Futures and Forex Trading Charts and plotted the dollar index… maybe this is totally wrong. Attached is what I saw…
Now that I think about it, I may be looking at the wrong chart. The green is large traders and the red is small speculators…which I mistaken for the long and short lines…
a little help…
But I’m sure I the divergence in the daily, but from the school of pipsology that doesn’t necessarily mean a trend reversal, in and of itself.
