A Guide To COT

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Commitment of Traders
- A Guide to Using COT Data Commitment of Traders Data (or COT) shows us the positions of the various players in the futures markets. The Commercials are the largest group. They own physical commodities and trade in a market to hedge - protect their assets from a loss. The Speculators and small traders are in the markets to make money from price movements.
In the futures market, any participant can go long or short, which means they can profit from an upward move, as well as profit from a fall in prices.
COT is a leading indicator, foretelling trend reversals. It is not advisable to use this tool for timing the market. There are times when you can use technical patterns to pin point entry after the COT has foretold of an impending reversal in the current trend. Below is a sample of how to read this data. This is a graphical representation of futures COT data for the British pound taken from www.cot-futures.com. Results are demonstrated using GBPUSD spot forex price charts. We will see how COT told us of impending moves in the past, and how to understand what the COT data says about the next moves of importance in various markets.
Reading the COT Chart: The orange line represents the positions of commercial traders. When they are near 0%, there is a high probability for the uptrend to top out and move lower. Once the orange line reaches near the 100%, it shows us that the commercial traders are long in the futures market, and price is most likely to end its downtrend and advance upward in the coming weeks/months.
Note: www.cot-futures.com calculates the positions of market participants relative to their past holdings, it is not an absolute percentage or value.
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GBPUSD, Example 1:
As the orange line approaches 2%, we can see that commercials are very short and we should expect a price reversal to the downside.
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Lets see what price action did :
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GBPUSD, Example 2: Now, lets look at the second signal the COT data provides us with.
Commercial Traders were increasing their short positions, which leads to a price reversal.
Price moves lower after the commercial traders are short.
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GBPUSD, Example 3: From the same COT data we can see a long signal to buy.
We can see the Commercial Traders acquired long positions in the British Pound (as indicated by the orange line moving to the top).
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Here is the price action chart. Observe how price moved up 700 pips between the end of March and early May before returning to its downtrend.
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GBPUSD, Example 4: This is the second Long signal from COT.
Once the Commercial Traders were extremely long, it was clear that GBP was due for an upward move.
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Price action follows the COT signal.
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My expectation:
Lastly, I would like to post an example of my expectation regarding a future event, by using COT's predictive qualities. Shown below is a chart of the Japanese Stock Index Nikkei 225 Futures. COT predicts an impending upward move. The commercial traders are extremely long as shown by the orange line.
This is the same COT data represented differently. In this chart below, the green line represents the commercial traders.
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This is the same data in text format:
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We can see from the COT data that the commercial traders are long, and extremely so. Lets look have a look at the technicals now.
Peak
2
This seems to be forming the #3 point of a major 1-2-3 bottom.
3 1
Lets look at the big picture first. The Nikkei peaked in December 1989 and has been in a secular downtrend ever since. We seem to be at the #3 point of a major 1-2-3 bottom pattern.
Stochastics is in the bottom and turning up on this monthly chart. This is important because of its confluence with the weekly Stochastics.
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An inverted Head & Shoulder pattern also makes the case for an upward move.
The inverted Head & Shoulder pattern is magnified on this Daily chart.
Shoulder Head
Shoulder
Weekly Stochastics has a double bottom and divergence to price.
There is confluence across timeframes for an upward move in the Nikkei 225. This may mark the end of the great bear market in Japanese stocks. This opportunity came to my attention by looking at the COT data. COT gives actionable advice if you understand how to use it alongside other trading tools. Never risk more than you are comfortable losing. We are dealing with the future here and there are no guarantees, only the ability to make informed decisions and await the time till the odds are in favor before placing a trade. Take a calculated risk. Speculation is a business, gambling an expensive hobby.
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Conclusion
The Commitment of Traders data shows us the positions of the various participants in the futures market. When we see that the Commercial Traders have extremely long, or extremely short positions, we should await a change in the current uptrend or downtrend using technical analysis, and then look to trade in the direction of the new trend. Also note that the examples in GBPUSD have worked relatively fast. In my experience, there are many times when you'll have to wait for a proper reversal of the trend. Once the COT data indicates that commercial traders are short at or below 10%, or long at or above 90% , I add that particular currency/commodity/index to my watch list and look for signs of technical reversal. Risk management, and most importantly your own trading psychology, are key factors in your own success or failure. In other words, COT is a great leading indicator but should not be used on its own. Await the price reversal after the signal. I will discuss other COT issues, such as 'Backwardation' cancelling a short signal, and the time element, in future posts at my blog: speculationandtrading.blogspot.com
Charts were taken from Prorealtime with permission, www.prorealtime.com/common/partner.phtml?page=main&language=en&from=136556 COT graphs and data were kindly provided by Barrie Lees, www.cot-futures.com Created by Yousaf, www.speculationandtrading.blogspot.com
Disclaimer This article has been created to journal the authors observations of the markets and is not to be misinterpreted as investme nt advice. All materials, including trading strategies, market analysis and tools, posted are for informational and educational purposes only. Understand that trading of securities, currencies and commodity futures always carries with it a substantial amount of risk. Do not misinterpret this information as a recommendation to buy or sell any currency, commodity, or other financial product. Always consult with your own financial adviser before engaging in any trading activity. Any monies invested in the markets are subject to loss. In fact, you may lose money in excess of the funds you invested initially. While a stop loss order is designed to protect you from excessive losses, it is by no means to be viewed as a failsafe insurance policy. Volatility and/or gaps in the markets may not allow for the execution of your stop loss and/or limit order and could result in a financial loss. Any mention of entry orders, exit orders, stop losses, limit orders, and their placement by the author of this blog shall not be misconstrued as investment advice. The author of this article shall not be held accountable for any losses, financial or otherwise, that may be incurred by you as a result of your engagement in the financial markets. The author strives to maintain the highest degree of accuracy, however, no guarantees can be made as to the reliability, completeness, or correctness of the data or information posted. You are ultimately responsible for any action you take as a result of information or analysis posted here and its associated consequences. Trade responsibly!
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A Guide To COT

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WWW.SPECULATIONANDTRADING.BLOGSPOT.

Lets see what price action did :

Price moves lower after the commercial traders are short.

GBPUSD, Example 4: This is the second Long signal from COT.

Price action follows the COT signal.

This is the same data in text format:

Weekly Stochastics has a double bottom and divergence to price.

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