Regardless of experience level, most Forex traders have heard at least passing reference to the Commitments of Traders (COT) reporting published every week by the US Commodity Futures Trading Commission (CFTC). Embedded within its sometimes bewildering array of mostly obscure statistics resides one specific metric which, when it hits extremes, provides the closest thing yet invented to the proverbial “Holy Grail” for predicting, and preparing for, major breakout moves in many of the most closely watched financial markets.
Simply put, if your goal is to catch the trend and let profits run, you need to prepare for when the current move is likely to end, and when the new one is likely to begin. Nothing can better help you catch these major turns in the market than Commitments of Traders reporting. Trying to execute Swing or Position Trades without knowledge of COT Net Positions data is like trying to take a long-distance journey relying on intuition rather than directional markers.
So how do you go about it?
Well, you could access the CFTC’s own public web page and download a massive, unformatted comma-delimited text file every Friday afternoon and stare at it wondering how to pluck those magic needles out of the proverbial haystack. Or you could access one or two of those free charting services on the Net which plot a wiggly line on a chart of some kind, but fail to provide you any context whatsoever (hardly confidence inspiring!).
Or...you could let us do the ‘heavy lifting’ for you instead, bringing you a comprehensive, user-friendly, interactive reporting regime which focuses on the one specific metric you need to watch, and which alerts you with clear, unambiguous commentary as to when the COT data appears to be forewarning a major trend reversal.
What We Do And How We Do It
Every week (almost always on Friday afternoons, after the CFTC publishes their latest raw COT data), we update our custom-designed databases for a total of 25 markets (15 currency related markets, plus 10 popular Futures markets), focusing on the Net Long/Short positioning of Commercial versus non-Commercial trader categories. These files include tabular data covering the previous 18 months, and two charts per market (six for currencies, since we chart Base, Quote and Paired data for those markets). We then look closely for evidence of extreme divergences of one side of the market versus the other: Commercial versus non-Commercial traders.
When a trend has been intact for some time, but Commercial traders reach an extreme position contrary to that trend (i.e. Net Long against a downtrend, or Net Short against an uptrend) which exceeds 90% of all weekly Net Position index values over an 18-month look-back period, we know that that trend cannot continue for much longer, and a change to the opposite direction becomes more likely.
Let’s take a look at a mini-case study example. Our COT database for the Australian Dollar shows us that from May 22nd, 2012 through to June 26th, 2012, Commercial Traders were making an implied Net Long position in the underlying AUD/USD Forex pair – both by going Net Long the Australian Dollar, and at the same time, going Net Short the US Dollar. In other words, gearing up for strength in one currency and weakness in the other.
If you compare the lowest low that was made on the Daily chart for AUD/USD shown below in late May/early June when the Commercial traders were going Net Long, to the highest high in the rally that subsequently unfolded (to the August 9th, 2012 Daily high at 1.0613), you can see that the total move covered a distance of over 1000 pips! Now who wouldn’t have wanted to be prepared for such a reversal of fortune for the Aussie dollar, which up until that point seemed to be stuck in a downtrend with apparently no bottom? And what other element of Technical or Fundamental Analysis would have realistically signaled such an abrupt about-face?
Timing Is Not What COT Does: But It Is What We Do
Staying with the above chart example for just a moment: There is one thing COT Net Position divergences do very well, and one thing they don’t do well. The thing they do well is forewarn us of sharp reversals. The thing they don’t do well is tell us specifically when the market has turned in earnest. One thing you’ll learn from our Getting Started guide is that the lag from when a Net Position divergence occurs, to when a tradable trend is well and truly underway, can be anywhere from one day, to as much as one month (occasionally even longer).
This is, in fact, the #1 quandary most COT followers have with the data. “OK, I understand the directional change I should be looking for, but when can I trade it?”
One of the things that makes our service unique is that, in addition to the tabular and chart data we publish each week for 25 markets, we also produce a Weekly COT Wrap-Up report which specifically flags which particular markets are giving us COT Net Positions divergences, and what the implications would appear to be.
Armed with that information, we look to confirm the trend change by way of a simple and effective (not to mention timely) two-part analytical test on the Daily chart. And when we find it, we tell you: “OK, now would appear to be a good time to look for a Position Trade long on that AUD/USD divergence”. Using whatever trade entry methodologies you prefer, all you need to do is get your stop to breakeven after sufficient movement favourable to entry, and then let profits run.
In the case of the AUD/USD long example, our Daily chart trend reversal filter confirmed a turn to the upside on the Daily bar open for June 7th at .9910, enabling capture of up to 700 pips in the ensuing run!
What Makes Our Service Unique
As a Forex trader, you’re most interested in COT data pertaining to currency futures. Now, if you want to know what effect Commercial Trader Net Positions are likely have on the GBP/USD pair, would it make sense to only look for a divergence in the US Dollar Index? Or would it make sense to only look for a divergence in Pound Sterling futures? Hopefully you would answer “no” to those questions. If any given currency pair’s price trend represents a tug-of-war between the two underlying currencies that comprise it, so too is it true that we have to look at both sides of the Futures market data: for both the Base currency and the Quote! And this is where most existing COT analysts fail: by not aggregating COT futures data for both currencies comprising a specific pair.
One of the things that makes us unique, in comparison, is that we aggregate currency futures data for both Base and Quote, which is necessary to provide a complete picture for the underlying Forex market.
It might be nice to know that Commercial Traders are Net Long the Euro at some point, but if they’re simultaneously Net Short the Japanese Yen, doesn’t it stand to reason that two explosive moves at the same time might stand to propel the EUR/JPY cross pair even more forcefully? Conversely, if Commercial traders are equally Net Long or Net Short on both sides of the pairing, there’s much less reason to believe a significant turn is in the offing. You need to look at both sides of the currency pair. And that is one way we can definitely help!
So not only do we track the seven currency majors against the US Dollar Index, we also similarly aggregate Net Positions data for a total of eight of the most popular Forex cross-pairs. In addition, we provide weekly coverage for a total of ten commodity futures, markets many of us like to look at for supplemental trading opportunities from time to time.
Our weekly COT coverage includes the following markets:
- Currency Majors
- Australian Dollar
- Canadian Dollar
- Japanese Yen
- New Zealand Dollar
- Pound Sterling
- Swiss Franc
- Currency Cross Pairs (Implied COT Positions)
- Commodity Futures
- Light Sweet Crude Oil
- Natural Gas
- Equity Indexes
- Dow Jones Industrial Average
- S&P500 E-mini
- S&P500 Stock Index
Our member’s page will provide you access to the following valuable resources:
- Getting Started Video and PDF summary document: Which provides a concise, simple and effective overview explaining what we look for in the COT data, and how we respond to it.
- Weekly COT Wrap-Up Report: Which summarizes any significant COT findings for the week in question, and highlights specific trend reversal confirmation signals on the Daily chart for which we will want to keep on the lookout. (See Sample Report)
- Data Tables and Charts: Available for download in your choice of Excel 1997-2003 or PDF formats, you can access the latest data updates (both tabular and in clear chart format) every Friday afternoon, just a few short hours after the raw data is published by the CFTC.
Simply put, if you’re serious about market sentiment and getting a handle on the #1 most important driver of market trend, it is absolutely imperative that you keep tabs on Commitments of Traders. And there’s no more quality-minded purveyor of that information anywhere on the Web than Forexmentor. Join us today!
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