Dunstan

The first market that was mentioned in this review (see my previous post for the video) was the sugar market. I think it is a great example for those of you, who would like to understand how to use the COT change indicator, what does a specific change size mean. The sugar market’s 20% change (on a 52-week range)in Commercials positions illustrates well that a 20% change may be considered large in one market, while in another market it happens pretty often, so it might be negligible there. You have to go back in time and see if that change size is really significant or not. If you look at the 1 year chart below, you will find that similar or even larger changes have happened in the past and not that rarely. Now does this mean that this 20% change will not have any effect on the price? Well I’m sorry to say this, but you have to do your homework, do a little historical analysis. I have indicated on the 1 year chart those situations when there were similar changes. I would say that roughly 70% of the time, such a change size had an effect on prices. Ok, now you might ask, whether this time it would have an effect or not. My answer to this question is: I don’t know. It’s all about chances… I think – looking at the chart – that this change size could move prices lower in the near term, but if you have a look at the 5 year chart, you can see that we are not at an extreme COT level for neither market participant, which makes it more difficult to predict a direction. Besides understanding to read COT signals and see what effect they might have on prices, I think it is also very important to know when to step aside from a market. I’m not saying that Sugar does not have opportunities, but I think one should always consider the risk/reward of the trade and search for those few markets where this ratio is more favorable. I’m personally looking for those situations when the picture is very clear, and you don’t need to do much thinking All the best, Dunstan New to COT? Read my first couple of posts in this thread or check out this [ame=http://www.youtube.com/watch?v=_68VHKzRWHM]video[/ame] for more info

The most recent COT report, the 30th report is out: [ame=http://www.youtube.com/watch?v=CaDiOn6Zu7U&feature=g-all-u]COT review[/ame] I’ll give you my view on this report in the following days, meanwhile check it out and if you have any questions, let me know! Have a nice day, Dunstan

Hi everyone, The next market that has been mentioned in this „[ame=http://www.youtube.com/watch?v=HLtdpNrghts&feature=plcp]COT review[/ame]” was the Feeder Cattle, because the second largest change in Commercials positions happened here. Not only was the change size significant, but if you look at the chart you can see that the whole COT picture is pretty extreme. I have indicated 4 places on the price chart which coincide with extremes in the COT. I would like to draw your attention here to the fact that on this market Small Speculators should be considered differently, because a lot of them are actually Commercial players, they just don’t reach CFTC’s reporting limits. If you don’t feel comfortable to trade futures, don’t forget that these days there are other great instruments as well --> ETFs. This page I found has a list of them. You can trade them like stocks! Have a nice day, Dunstan

Hi everyone, I figured that now that I have more or less talked about all of my COT analysis tools I use, I should start something else. I’m still open to any questions regarding this topic, so please don’t hesitate to ask! There is a so called “Weekly Commitments of Traders Review” that is published every week on YouTube and gives a sneak peak on the most active markets – regarding the COT report. I thought that I could pick some of the markets mentioned in these reports and give you my own thoughts about them. How does that sound? The most recent report can be viewed [ame=http://www.youtube.com/watch?v=HLtdpNrghts&feature=g-all-u]here[/ame]. 2-year Note There was a -39% change in the Commercials positions, they changed their net short positions from -100.000 contracts to more than 210.000 contracts short. The attached 1-yr chart shows that there was one similarly large change in the past one year which resulted in a price-decline in a few days. The other interesting thing to see is that the COT picture is pretty extreme, Small Speculators COT Index shows 99%, while the Commercials COT Index shows 1%. All this looks pretty bearish to me, and as the report said, it could be a good risk/reward trade, because there are some close stop levels not far. If you don’t feel comfortable to trade futures, don’t forget that these days there are other great instruments as well --> ETFs. This page I found has a list of them. You can trade them like stocks! All the best, Dunstan

The last interesting signal I would like to show you, is actually relatively new to me as well, I’ve read it here, the so called “Commercial Capitulation”, let me quote what they said about it: Commercials hedge the most when they believe that the actual price is very favorable for them to hedge their future production. While they have an information advantage, they still cannot know the future. Sometimes, major shifts occur, that forces Commercials to unwind their hedge positions. Since they generally have deep pockets, their stress barrier is high, but not absolute. As the losses grow to critical levels on their trading accounts, they have to liquidate: buy back short contracts or sell the longs. These trades further fuel the steep price moves that caused the unfavorable situation, so the positive feedback loop leads to parabolic price rises. It happens very rarely, but I think it is good to know about it when you look at an All Time or close to All Time extreme situation, where you are thinking of a big trend reversal… it not always happens! I’m attaching the cotton example here, but on a longer, five years chart. I have indicated with a red line the place, where there was a very large COT extreme case, Commercials were at roughly 70000 contracts short, so at the time one could have thought that it’s a good short opportunity… Well it turned out that it was one of these cases and prices just skyrocketed from there.

Hi varaamo, Thank you for the questions, I’m happy to see that you’re also interested in COT analysis! Let me answer your questions one by one: 1) I personally use the 52week (or you can say one year) range, but it is possible to set this range differently. The service I’m using uses a 52 week default range, but allows you to change that to any time range of your choice! I think it could be modified depending on the market you’re doing the analysis on, since there are markets where large changes are more frequent than on other markets… so maybe by setting the time range longer on these markets, you can filter out the wrong signals. The change size is again something you have to look at relatively… There are markets where a 15% change can be considered large and thus has a signaling value, but the same percentage change on another market can be neglected. Unfortunately I can’t say that there is a thumb of rule to this, it has to be experienced and then defined individually for each and every market. I don’ t have such a list (in case anyone asks for one:) ). I personally order all the markets each week and look at the top 5-10 ones where these changes where the largest. Then I open these charts one by one and examine them closer to see how the prices reacted to such changes in the past. All in all, one must understand that although the COT data itself is a very objective fact data, built from all sorts of numbers, it is telling you something about the underlying futures markets… Now it is the individuality of each market that decides whether the COT signal will have any effect on their prices or not. 2) I honestly don’t know what the standard is, but it is set to three years at the service I’m using. I know that I could change this range between one and five years. I would say that the analogy should be the same here as the one explained above, but you’re definitely not making a big mistake, if you leave it at the pre-defined three years range. If I understood correctly your question about crossover strategy – but please forgive me if I’m wrong – I only use it for the Large Speculators. If by crossover strategy, you mean, when they cross the 0 line, than yes, I use it, but not as a different strategy, it perfectly fits beside the others. It is just important to know, if LS are net long or net short. LS being under the 0 line mean they are net short, above it is when they are net long. Again this is something market specific, but I believe, that in general, LS are the ones, who are with the long term trend and thus it is important to know where they are! I hope I could answer your questions! Please don’t hesitate to ask more:) Have a great day, Dunstan

I think I should not have written 93 in that earlier post… I could have written any other number; I meant it as an illustration. Anyways, I’m glad if I was able to clear that out and give a useful example (with S&P-500) in my previous post. Actually for my COT analysis, I use the following indicators mentioned previously: 1) COT Change: It compares the level of the change in COT data to a predefined range of the data and shows this change in percentage compared to this range. Large changes can sometimes be great signals as shown in my previous example (Oats). 2) COT Extreme: It shows how many reports ago stood the given COT data at the current level. In case of All Time signals, it means that the given COT data has never in the past stood at that level, these signal are relatively rare and thus are extra strong signals. 3) COT Index: A classic analysis technique of COT data. By establishing a lookback period, it is possible to “normalize” COT data on a 0-100 scale. A 100 reading shows that during the lookback period, the current reading is the maximum; a 0 reading show that it is at a minimum. 4) Long-term trend: I’m interested where the Large Speculators are headed. During a trend it is good to follow them, but of course at COT extreme levels, usually it is the Commercials who are on the right side of the market! I believe that the indicators above should be enough for a good COT analysis, but I appreciate it if anyone shows me another indicator that is useful too! If you would also like to have access to these indicators mentioned above, goldfinger has already asked me which service I’m using --> it is COTbase.com. Please let me know if anything is not clear, I would gladly explain it to you, if I can! Have a great weekend, Dunstan

Ok, sorry about that... now I understand. So you disagreed to what I said about the COT Extreme indicator. I am sorry if I was confusing or not precise with my description... Let me explain to you what I meant, what does COT extreme mean. I will show this on the latest COT report (28th in 2012) for S&P-500. If you check carefully, you will find that Commercials are at a 2 report extreme, Large Speculators are at a 3 report extreme and Small Speculators are at a 7 report extreme level. On the one month chart I have indicated where the Commercials and Large Speculators stood 2 and 3 reports ago. The reason I am saying reports, instead of weeks, because a couple of years ago, CFTC published the reports only every 2 weeks! So in our example here, I could have said 2 and 3 weeks, but the term ‘report’ is more precise. In the Soybeans example that I was showing you earlier, the COT extreme for Commercials and Large Speculators was showing “AllTime”, which means that these market participants have never in the past stood at such levels. It is important to understand – but it’s best if everyone does their “homework” = historical analysis – that large COT extremes, especially All Time extremes many times coincide with turning points in prices and that’s why this indicator is of such importance. I hope I could explain it to you clearly enough, but please let me know if there’s still something you don’t understand or you disagree with, all remarks are much appreciated!  Thanks again for you post, Have a great weekend, Dunstan

Follow the smart money / Large Speculators It is important to see that in the long term, Large Speculators are the ones, who are following the trend, so it is important to have your eyes on them all the time. In the following example you should see what I mean.

Hi everyone, Sorry for my late reply, was out of town for a couple of days… Let me reply one by one to all of you: kuokam: Please describe your question a little more detailed because I cannot help you now… On which market, which report, what kind of value (%?) and what signal did you see the reading 93? The COT charts that I post (red, green and blue lines under the price charts) are all Net charts for the specific market participants. So for example on the Corn chart that I posted the last time, if you check the green line (Large Speculators), they are at roughly 200.000. That means that large speculators – in net – are holding 200.000 contracts long at the moment (report date: 07/10/2012). drebg: Thanks for the compliment; I’m looking forward to your posts! flyingscotsman: Steve Briese is definitely one of the best COT experts out there; there is no question to that! I would not like to make the impression, that I’m a COT expert, but I have been using COT analysis for some time now in my trading and I believe that it could be of great value to others also! goldfinger: I’m subscribed to Commitments Of Traders - COT Reports, Charts, Analysis and Data - COTbase.com . They give the cleanest COT data, not only the classic COT charts but all other report types too (CIT, TIFF and Disaggregated). They have both “Futures only” and “Futures and Options” data types as well. I know it is not part of this topic, but I like to get a picture about how the volume and open interest has changed and they also do analysis on that… Another great function I use, is the Highlights they do --> if I don’t have time to go through the markets, I just want to have a brief picture to see where there were great moves, I open that page (I’ve attached a picture on that - only Buy signals, but there are Sell signals also). There are some services out there, but I found that I get the most for my money here… I’m very glad to see that so many people are interested in Commitments of Traders! Please let me know if you have any questions. I’m open to any discussion also! Have a great day! Dunstan

COT Index In the following example I would like to explain to you another great COT analysis tool, the COT Index. It is also a measuring “device” for extreme pictures in the Commitments of Traders report, but here the Index shows us in percentage – compared to a specific time period – how far we are from the range. In the following example (on Corn), I’m showing you what the 95% COT Index in Small Speculators means. I set the chart to show a three year period and I set the COT Index to for the same period. I drew the 0% and 100% lines so it’s easier to see what this 95% means. If you look carefully, when Small Speculators were close to 100%, prices declined shortly afterwards. When Small Speculators were closer to 0%, prices soon started to increase.

EXTREME COT CHANGES The title sounds similar to the previous post, the difference here is that we are looking at sudden large changes in the positions held by the main participants of the markets (C-LS-SS). To give you a great example, let me show you an example from 2010 on the oats market. Actually here I can show you a Buy and a Sell signal from Commercials close to each other in time. If you look carefully, you could see that the two circled changes are much greater than the surrounding changes that can be considered average size changes. Obviously the green circle is indicating a Buy, the red circle a Sell signal. Before I had to check each and every market week-by-week and search for these large movements… these days I rely on programs that do it for me. If you would like an easy solution, use a service that can show you these signals. The one I’m using now does it by taking the current change and compares it to a pre-defined range. The good thing about it, is that I have the option of defining the range myself, example: for one year range, all-time range or even 43 weeks range (!) if that’s my desire. Let me show this on the 27th report on RBOB Gasoline: The system is showing me the changes on a 52 week (1 year) time period. It shows that Commercials have changed their net short level and went even more short. This change was 10%. What does it mean? Well I’ve drawn the 100% with purple and the chart is set to show the past 1 year. I’ve indicated (with red) the 10% change, which is measured to this 100% total range. It’s that simple. Now obviously if you’re using such a system, all you need to do is let the system search automatically for the largest changes that happened and then you only need to analyze those and see whether there is an opportunity to get in the market or not.

COT EXTREME signals I think one of the best tools in COT analysis is the COT Extremes. It basically shows you where the given COT level stands historically. So if a reading says 93 for example, then it means that the current level of Open Interest for a given market participant (C-LS-SS) is at such level, where it stood exactly 93 reports ago. My experience is, that the larger this COT extreme is, the greater the chance is for the market to change direction. There are so called ‘All-Time Extremes’ when the given group of traders have never stood at that level before. These are relatively rare situations, but they do happen from time to time. It the following example, which is for Soybeans, I’ll show you how the Commercials Extremes can help you find turning points in the market. The red lines are indicating points in time, when the COT picture showed an opportunity to short the market, while the green ones are indicating good buy opportunities. The example I’m showing you now is from late April, this year, when there was an All-Times COT Extreme picture -> Commercials were at All-Time short levels, while Large Speculators were never so optimistic about the market. In this case, Small Speculators were more or less neutral in the sense that they were not at an extreme level. The reason I’m showing you this example is because just today, I have checked the most recent COT report and I found an even greater All-Time signal. The difference between the two picture is that today, the Small Speculators are also at an extreme level. The reason I’m so excited about this, is because I think those are the best COT Extreme pictures, when all three main participants are at Extreme levels in the positions they’re holding. I’m not saying that trading only on COT signal is easy, but one thing’s for sure: sooner or later there will be (or there is already!) such a stress level in soybeans that will push prices lower. Stay tuned, I'll be coming back with some more example shortly! Meanwhile, if you have any questions, please don’t hesitate to ask!

Hi everyone! This thread I’m just opening, would like to share ideas about trading in the futures market using a simple but very effective tool, the Commitments of Traders report. I would be very much interested in your experiences and thoughts about this data and how it has helped your trading! Personally I have first seen this data set roughly five years ago, and “fell in love with it” right away! The concept that amused me at the time was that with this COT report you get a legal inside look in the markets --> you get to know what the main participants of these markets are doing! If you are new to this report, let me explain to you the basics: Who provides the COT report? The report is prepared by the Commodity Futures Trading Commission (CFTC) What does COT report show me? The Commitments of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. It separates traders into three groups: Commercials, Large Speculators and Small Speculators. Commercials are those participants of the market who either produce that specific commodity or use it for the daily business. Large Speculators are generally big investors, hedge funds holding more contracts than the reporting limits, Small Speculators are the “rest” (you and me, who hold fewer contracts than the reporting limit. Conclusion: So basically the report shows you where these participants are standing on Tuesdays. For an illustrated good explanation, I’ve found [youtube.com]_68VHKzRWHM on YouTube, it explains everything in understandable English what the Commitments of Traders report is about. When does the report come out and where can I access it? It comes out usually on Fridays, but on holidays (such as 4th of July) it comes out usually the next week Monday. This is a free data that CFTC publishes every week and is accessible on it’s site (here). For many years I had to go through a relatively difficult process of first downloading the COT data, converting it to usable format and then importing it in adequate program. If you check CFTC’s site, you will find that the data there is in a raw format that is hard to read… Well these days there are a few services that provide this data in an easily readable, graphical format. I’ve checked most of them, I think cotbase can be considered the best. I like it because it has the cleanest data available (combined and corrected data) and all the COT report types that are available today. Let’s get down to business… How does the COT report help my trading? Well since now we know that it gives you a legal insight on major market participants positions, simply – in accordance with the threads title – you just have to follow the Smart Money! Ok-ok… you might say: “yeah, sure, but who is the smart money?” Well doing your homework and studying the historical reports (the classic COT report has been published since 1986), you will easily see that at certain times, especially in extreme COT situations, knowing where the major players are positioned, will help you enter on the right side of the market. I’ll show you some great examples soon, but for now, let me leave the “story” at this stage, I would be very much interested in your thoughts and ideas, so please share them with me and if you have any questions, I’ll try my very best to answer them! All the best, D