Follow the Smart Money / COT Analysis

This is a discussion on Follow the Smart Money / COT Analysis within the Futures & Options forums, part of the Markets category; Hi everyone, I figured that now that I have more or less talked about all of my COT analysis tools ...

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Old Jul 24, 2012, 12:59pm   #16
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread 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 .

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
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Old Jul 24, 2012, 4:09pm   #17
 
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Re: Follow the Smart Money / COT Analysis

Quote:
Originally Posted by Dunstan View Post
Hi Dionysus Toast,

I have attached a chart on Corn, showing you the latest COT report. Small Speculators are the ones showing anything interesting: They are at 191 reports extreme and the COT Index – set on a 5 years range – shows 91%. All this is sort of a bearish signal, but it would be nicer, if Commercials and Large Speculators were also in such extreme territories. I don’t think that this signal from small speculators has that significant effect on prices on this market at least that’s what I can see now looking at similar situations in the past.

What also bothers me, when thinking of a short opportunity is that the volume and open interest score is showing me +18 out of the possible 20, which is an extremely bullish signal. (for more info on volume and open interest analysis: this page I found has great info)

I would be standing aside on this market and wait for a large sell signal from Commercials ( > 20-25% change on a 52w range) and a COT index closer to 90% before going short... OR I would stay long and follow the LS!

Dunstan
Fair enough - the crops have taken a beating and it's interesting that you came to the conclusion you did without mentioning that because it's the same one you'd come to if you were watching the news on the crop.

On a different topic - how does this work differently (if at all) when the market is a real commodity - oil, coffee, corn etc verus a purely financial product such as an index future? Is it the same game or different?
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Old Jul 25, 2012, 8:20am   #18
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi Dionysus Toast,

Each and every market has its own characteristic, so if you suspect that the COT analysis can have different results on an index future than on a grain future for example, you are absolutely right.

To give you a good example, here is Live Cattle. The usual picture, when Small Speculators have a unique chart does not stand here. If you look at the chart I’ve attached, you can see that they have a pretty significant correlation with Commercials. This is so, because a lot of Small Speculators on this market are actually Commercial participants, just they don’t reach the reporting limits that CFTC determines. You have to be careful how you read the signals from Small Speculators here.

I think once you get to know better the participants on the different markets – by doing a historical analysis – you will understand how to interpret the signals on them.

Of course a large change in the COT data or an extreme COT picture is always something that can contain a good trading opportunity, but you have to examine them with regard to the market that produced the signal, check and see, weather similar pictures in the past have had any effect on prices or not.

All the best,
Dunstan
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Old Jul 26, 2012, 1:19pm   #19
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi everyone,

The next market that has been mentioned in this „” 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
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Old Jul 30, 2012, 2:02pm   #20
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread The most recent COT report, the 30th report is out:



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
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Old Jul 31, 2012, 9:41am   #21
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread 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 for more info
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Old Jul 31, 2012, 9:43am   #22
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread sorry, I forgot the two charts
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Old Aug 1, 2012, 2:33pm   #23
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread The Chicago Wheat -->

The latest report showed that Large Speculators are at All Time, Commercials are close to All Time Extreme levels. I have indicated on the chart for you similar situations in the past, when the picture was same/or/similar.

Of course as I have said before, since COT analysis is not a tool to be used on its own, one should not think of this as a signal to go short, at least not right away, but it definitely signals a high level of stress in the market, which could support a bearish move soon.

So if your system allows you to go short on this market, you would definitely have some sort of support from the COT data OR if you just found this opportunity by the usage of this report, you could analyze it, whether your system allows you to enter or not.

All the best,
Dunstan
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Old Aug 2, 2012, 8:17am   #24
 
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Re: Follow the Smart Money / COT Analysis

Thanks for your efforts Dunstan, I really appreciate it! I was always really interested in the COT report, I think I need to dig a bit deeper now, it sounds very useful to me.
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Old Aug 6, 2012, 8:38am   #25
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Thanks Samy32 for the compliment!

One of the most exciting markets that was mentioned (), is the Wheat (Chicago), so today I’ll talk about this market.

On the attached chart I think even someone new to the report should see that we are at an All Time (or to be precise, close to All Time) extreme picture in the Commitments of Traders report on Wheat. It is only the Small Speculators who “still got space” to become All Time extreme, but still they are also very extreme.

I have also drawn on the price chart those places in time, when the COT picture was similar. This picture that we have now can definitely be considered a good signal from COT.

Now obviously I cannot say that this is the time to go short, it is up to you to decide how you wish to interpret the signal, all I’m saying is that the stress level in the market – as cleverly used in the review – is becoming extremely high. It maybe that prices continue further up for a few more weeks, I don’t know, but I do know that it will be this market that I will closely monitor in the near future.

I know that there might be traders now who are viewing my thread and are not comfortable trading futures or options on futures, so my note to them is this: there are ETFs (a great list here) that follow futures contracts and can be traded just like stocks.

The three Wheat ETF that I found:
WEAT: direction - Long / leverage -1x / exchange - LSE
SWEA: direction - Short / leverage -1x / exchange - LSE
LWEA: direction - Long / leverage -2x / exchange - LSE

Please let me know if you have any questions,
Have a great day,
Dunstan
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Old Aug 6, 2012, 8:38am   #26
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread sorry, I forgot the chart
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Old Aug 6, 2012, 9:09am   #27
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Ok, I thought I’ll show you another market as well, since you might say, that I’m talking too much about wheat

Cocoa was also mentioned in the review, cause the change size in Commercials position was larger than average. It was 28% to be exact. Now this market could be a good example, how to react to a market, where we haven’t got an extreme COT picture. It is only the change in positions that was such that we can talk about it.

I think you should follow the same notes I’ve given earlier, to view this as a confirmation to your existing trading idea or it might just signal an opportunity that you should put in to your system and see whether it should be traded or not.

In the following chart I have indicated similar pictures when Commercial’s changed their net positions this way. I wouldn’t say that this signal is as strong as the one in wheat. If prices react to this and they start to fall, they might just fall to 2000-2100 level, but hey (!), if they do that and you’re in, that’s “fair enough” . Maybe we would get to a level in COT where it is signaling a good buy opportunity…

The four Cocoa ETF that I found:

NIB: direction - Long / leverage -1x / exchange - NYSE
COCO: direction - Long / leverage -1x / exchange - LSE
SCOC: direction - Short / leverage -1x / exchange – LSE
LCOC: direction - Long / leverage -2x / exchange – LSE

Please let me know if you have any questions,
Have a great day,
Dunstan
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Old Aug 8, 2012, 10:19pm   #28
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Re: Follow the Smart Money / COT Analysis

This is not new, the COT report has been out for decades and is available to anyone. If you think that can give you an edge you are having a laugh.
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Old Aug 9, 2012, 9:06am   #29
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi MacroStyle,

Thank you for your view on the topic. If I may reply to the two points of yours…

First of all, you are right that the report is not new and that it is available to anyone. I have never said that the report is new and I have precisely given the source (CFTC) where it can be found. Second of all, your view is that the COT report cannot give a trader an edge, so to say, knowing that for example Commercial participants in the Wheat market are net short 40.000 contracts and that Large Speculators are holding so many contracts net long as never before… that this information is irrelevant? Well I don’t think so, but it is the freedom of any trader to decide what information they believe has value and what does not. My view is that these kinds of information contain value which can help achieve better results in trading.

To get back to your first remark, I think that just because the report has been out for such a long time does not necessarily conclude that everyone should know about it. In my experience, talking to dozens of traders, the majority of them have never even heard about the report. I’m glad that you are not one of them and actually I would much appreciate it if you could share with us your experiences using the report in your trading. Maybe by doing so, I could highlight you some mistakes that you might have made in the implementation of the report, thus you might change your view on the usefulness of the report in time.

Have a great day,
Dunstan
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Old Aug 9, 2012, 11:30am   #30
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Re: Follow the Smart Money / COT Analysis

Dunstan,
Please ignore the silly remarks on this thread and continue.
I find your analysis and comments enjoyable, educational and useful
You are doing a brilliant job !
Thankyou for the time and effort you put into it.
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