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 justtrader, I知 very happy that you are satisfied with my thread, I値l do my best to keep it that ...

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Old Aug 9, 2012, 11:47am   #31
Joined Jul 2012
Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi justtrader,

I知 very happy that you are satisfied with my thread, I値l do my best to keep it that way

Thanks for your support,
Have a great day,
Dunstan
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Old Aug 9, 2012, 11:55am   #32
Joined Nov 2010
Re: Follow the Smart Money / COT Analysis

The information within the report is relevant but because its used by the majority of major market particiants i have never found it that useful in terms of actual trading.

I have previously used the data in the following way:

(Large spec longs - large spec shorts) / open interest then normalised over a 5 year period using a percentile method. The idea being to call tops and bottoms when specs are max long or short.

I made a spreadsheet a few years that feeds all the data in from bloomberg and does the calcs for all the contracts.
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Old Aug 9, 2012, 12:02pm   #33
Joined May 2012
Re: Follow the Smart Money / COT Analysis

Quote:
Originally Posted by MacroStyle View Post
The information within the report is relevant but because its used by the majority of major market particiants i have never found it that useful in terms of actual trading.

I have previously used the data in the following way:

(Large spec longs - large spec shorts) / open interest then normalised over a 5 year period using a percentile method. The idea being to call tops and bottoms when specs are max long or short.

I made a spreadsheet a few years that feeds all the data in from bloomberg and does the calcs for all the contracts.
Hi Macrostyle,
Would be kind enough to post a screen shot of your excel sheet for me to get a better understanding.
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Old Aug 9, 2012, 12:11pm   #34
Joined Nov 2010
Re: Follow the Smart Money / COT Analysis

A second thought if you are interested in market positioning and sentiment I do find EPFR fund flow data and the Daily Sentiment Index survey data quite useful although you do have to pay for both of these.

Fund Flow data because EPFR cover the majority of retail investment funds and provide daily subscription and redemption data and monthly sector allocation data. I have found this alot more useful when trying to work out what 'real money' is doing.

The Daily Sentiment Index is a daily survey of locals on the exchange and it covers most futures in the US and on European exchanges. I find it a good approximation of 'fast money' and because it is a daily survey indicates sentiment more quickly and accutately than the COT report.

I work for a Hedge Fund so have subscriptions to both services, not sure how much its cost. Probably too much for retail guys unforunately...
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Old Aug 9, 2012, 1:42pm   #35
Joined Nov 2010
Re: Follow the Smart Money / COT Analysis

Couldn't find the original sheet so I have attached an example for S&P E-mini. It uses a Bloomberg feed so if you don't have a terminal its not gonna update.
Attached Files
File Type: xlsx COT Example.xlsx (33.3 KB, 464 views)
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Old Aug 9, 2012, 1:53pm   #36
Joined Oct 2003
Re: Follow the Smart Money / COT Analysis

Thanks for your posts regarding this topic.

I have follwed the COT in the past but due to the nature and delay of receiving this information it is still difficult to obtain any specific type of edge.

My take on it was that if the non coms (speculators) were trading at extremes the theory would be that they would have to sell if they were at long extremes (and vice versa) . I was looking at ratios of around 3:1 on a weekly basis.

The main problem with this is that you would need to have pretty wide stops in order to try and develop an effective trading plan.

Could you give an indication what your TP targets and stops are?

Thanks

Mick
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Old Aug 9, 2012, 3:00pm   #37
Joined Jul 2012
Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi MacroStyle,

Thank you for the more detailed explanation on why you find the report not as useful.

The tools I知 using are provided by a service that I致e been using for over 8 month now. I haven稚 found anything similar elsewhere yet and unfortunately I do not have the capabilities or experience to prepare such a system on my own, so I was really glad to find it. Before, I just looked at the COT charts, but with the Analysis table at COTbase I can easily find great signals.

You said that you basically used only the COT data of the Large Speculators, but I think that in this way you were 田overing an eye. I believe that looking at also Small Speculators and Commercial participants would show you the full picture.

The Daily Sentiment Index that you mentioned sounds interesting but as I see it, it concentrates on Large Speculators, while the COT report shows you the positions of all 菟layers. It would be nice to know how this Sentiment Index is prepared, what input data is required.


Hi mik1973,

The COT report comes out weekly now, but it used to come out only every two weeks and before that only on a monthly basis. I hope that this trend will continue and maybe one day we shall have daily COT reports.

It is true, that the COT report serves much better those traders, who trade on a longer time-horizon, for more active traders who might trade intraday the report might not have such a value.

In general you are right, that purely on COT report based trades one might have to use wider stops. I think this is the case at extremes, for example in the Wheat market that I mentioned earlier. Although we are at close to All Time Extreme levels, the COT charts could easily widen more for a few weeks, so it isn稚 that easy. For the Cocoa example, where it was the COT change size that was significant you could take a closer stop, since the signal should take effect sooner.

I would rather not go into more detail now, how I would enter/exit a trade, use stops etc cause than I would be narrowing down the usage of COT analysis to a specific strategy that I use. As I have said it a couple of times before, I urge anyone interested in the report to try to implement it in their own system and see whether it would produce better results overall.

I know it might be a disappointment to some of you seeking system recommendations from me that I don稚 provide any, but my goal with the thread was purely to introduce the report and some analysis tools on it to those who have never heard about it before (read post #10). Of course anyone who wishes to share their system using the COT report is free to do so and I知 willing to discuss any specific trading opportunities one brings, of course from the perspective of the COT report.

I hope you won稚 lose interest in my thread just because I知 not giving live calls and I hope that the examples I知 bringing should 途ing the bell when seeing them It should be quite obvious that my two last examples from the recent COT report could be considered valuable signals that one might see as an opportunity to trade
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Old Aug 9, 2012, 4:52pm   #38
Joined Oct 2003
Re: Follow the Smart Money / COT Analysis

Thanks for the reply- will be following this thread with interest.


Mick
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Old Aug 9, 2012, 6:11pm   #39
Joined Jul 2012
Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Great news Mick!

See you around,
Dunstan
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Old Aug 9, 2012, 9:53pm   #40
Joined Nov 2010
Re: Follow the Smart Money / COT Analysis

Dunstan

The DSI can be found on Jake Bernstein on Futures, the site doesn't look very professional but the data is pretty widely used (I was put on to it by a Merrill Lynch research report).

I focused on the large speculators because the other two groups (small spec and commercial) usually just have the opposite position. Which makes sense because by definition the overall position across all three groups has to be flat.
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Old Aug 10, 2012, 10:55am   #41
Joined Jul 2012
Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Thanks MacroStyle for the link, I値l have a look at it.

I understand your reasoning why you look only at Large Speculators, and in general it is true, but on many occasions it is the other two participants generationg the signal, which you would not necessarly see if you only look at LS.

Have a great weekend,
Dunstan
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Old Aug 13, 2012, 10:13am   #42
Joined Jul 2012
Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi everyone,

Let me share with you the link to the latest !

I would like to start with Wheat, since I was talking about it the last time already.

As the attached chart shows, nothing really changed in the picture since last week, we are still at an extreme in the COT, which studying the past similar cases seems to be a good short opportunity. Of course I know that some of you might want me to give exact entry levels, TP levels and stop levels, but instead I would just recommend you to have a look at other posts in the forum, where they might talk about systems, strategies that can offer a tool for such a situation. All I wish to highlight here is that Wheat is a market these days/weeks, where market participants are holding positions that are extremely long/short compared to their history. This is sort of a bubble that will burst sooner or later and it is advised to have one eye on it these days

Live Cattle I think is also interesting. It was mentioned in the review, because Commercials changed their net position, further increased it by 16%. It is interesting really that Commercials and Large Speculators are both net long, while Small Speculators are the only ones net short in the market.

Of course as said in the review, a lot of Small Speculators are actually Commercials, they just don稚 reach the so called 途eporting limits. If you look at the chart of Commercials and Small Speculators, you should see that the two lines have a strong correlation.

Looking at the picture, I would say that it is bullish, so if you were already long this market, you might want to stay in or if you were thinking of going short, this might not be the best time for that.

I am also open to discuss any particular market that you are interested in if you have any.

All the best,
Dunstan
Attached Thumbnails
report32_wheat.png   report32_live-cattle.png  
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Old Aug 14, 2012, 11:55pm   #43
Joined Aug 2012
Re: Follow the Smart Money / COT Analysis

Dunstan:

This is only my 4th or 5th post on the forum but I have been in the markets for about 15 years or so. Nice work with the thread. It is always good to see fellow traders with a real passion for the markets. I agree with you analysis of the COT being like part of the car to make it run. Many other parts or tools are needed. The COT should be one of them. I use a few basic TA tools and some seasonal aspects of the markets. However, I don't trade contracts but write options uncovered. The timing for entries is not as critical and I sleep better at night not having to worry about my stop-loss being to close to the current price. The price can even go against me and the option premium can still go down sometimes. The COT does give some good insight to where the big money is going but other tools ARE needed before entering a trade as you stated.

Looking forward to your future posts. Pun intended

Trade well.
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Old Aug 15, 2012, 8:40am   #44
Joined Jul 2012
Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi optsonly,

I知 glad that you understand the concept I was trying to explain earlier and you use COT analysis as a part of your system. I believe that COT analysis fits well with the strategy you are using.

Do you sell closer or further options, if I may ask? (I mean the expiry) I guess we are talking about OTM options. I致e tried this before, but I found that the liquidity in OTM options on smaller markets (oats, orange juice etc) is very small and thus it is difficult to get in. ATM options have much larger liquidity, but selling them uncovered would be riskier I believe.

It is very exciting for me to meet someone, who uses purely an option writing strategy, cause during my studies, I found it to be possibly one of the most profitable strategies. Unfortunately in practice I haven稚 used it that often and for the reasons mentioned above I put it aside but I知 always thinking of getting back to it one day.

I think that COT analysis combined with a good option writing strategy may become a profitable system. One of the most significant signals from the COT report is those situations when there is a COT extreme in the market. The only difficulty is that such an extreme can last for weeks before prices start to react to the signal, so with a more classical trading technique, you would be using wider stops to enter the trade leading you to a poorer Risk/Reward ratio. If one was to sell an OTM option at the extreme, he would pretty far from the spot price, thus the delta would be small enough to bear the price action against him for quite some time. And time is always your friend in option writing, which is also favorable.

Would you consider opening a thread on this strategy? I would definitely be following it!

Thanks for your post,
Have a great day,
Dunstan
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Old Aug 15, 2012, 12:34pm   #45
Joined Aug 2012
Re: Follow the Smart Money / COT Analysis

Dunstan:

The options I sell are OTM and are can be a good bit away from the underlying price. I am more concerned with the time decay of the premium of the option. However, I still approach selling the options as I would trading the contracts outright. The 'signal' has to be there if I were to go long or short a contract for me to sell a put or a call option. There have been many times, and I am pretty sure that I am speaking to every trader here, when we had the market direction correct but we were stopped out too soon. If I sell an option that is 30% or 40% away from the current price that gives me a lot of room to let the 'shake-out' happen and keep me in the market.

I am not too concerned with the delta because there can be less opportunities to sell options during a month or quarter versus trading contracts so if I use the delta as a filter also then that could limit my trades. For, instance there can be a lot of opportunities to reenter a trend when trading contracts but if there is a seasonal aspect to a certain commodity that 'should' come into play in a month or so there might not be enough time premium left in the options to sell to make it worth the risk. But, there could be ample room left in the trend to bank a few extra $$$.

I did post a thread a few days back asking if there were any option sellers in the house and there was one response. I will post there from time to time if there is some interest. A few years back I managed a website, forum, and posted to another forum with almost 3K posts with a FOREX method but the time involved was too great. I love the FOREX markets but it was taking up too much of my time and I was forgetting about the important things in life. Selling options gives me that time back. I love charts and the analysis and being able to take part in a world market that is unique has its draw for me as well.

I'll post back here and in the thread I mentioned previously....stay tuned...
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