Follow the Smart Money / COT Analysis

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 a video 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,
Dunstan

well, does it really show where all the participants are in that week? What about the options market, the spot market or just the over the counter agreements (forwards). You don't see any info about that in your cot report.

I am always against extrapolating reports to other markets, that are actually only good for one market (i.e. the futures market).

Hi Custos,

You are right that this report is most useful on futures markets, so traders who trade only regular stocks might not have interest in it. But the 46 markets that I monitor each week (see the list attached) carry great opportunities.

I suggest for those viewers of my thread, who have a smaller account size and thus can’t trade directly with futures contracts (or options on them) to look towards ETFs (a great list here) that can be traded like stocks.

I must disagree with your statement that the report is good only for the futures market. It is also very useful for those traders, who trade forex or options on futures as well.

The COT report has two data types: Futures only and Futures and Options.

Please stay tuned to my thread, I promise to come back with some very useful tools that I have found and I’ll show you some great examples as well.

I would welcome your thoughts about COT analysis and the specific tools I’m about to show in this thread.

Have a wonderful day,
Dunstan

the list

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.

Stay tuned, I'll be coming back with some more examples shortly!
Meanwhile, if you have any questions, please don’t hesitate to ask!
Dunstan

Hi Dunstan,

thanks for your efforts, this is a topic I find very interesting.
In your examples, could you briefly discuss how you would have spotted those entry points as they occurred? It seems to me that they would not have been obvious COT extrema at that point.

Hi Dunstan.
check out this one . I want to know more about COT.
http://www.optionpopularity.com/

Thanks for this offer to provide insights

When I look at the reports, I get five groups instead of three.

Dealer Intermediary, Asset Manager/Institutions, Leveraged Funds, Reportables, and Non reportables.

I would have to say that the Institutions would be... well... The institutions. Buuuuuut, who in the world are the Dealers and Leverageds?

A blog analyzing COT by a professional.

http://cotstimer.blogspot.sg/

thx

Hi everyone,

I’m happy to see that there are a lot of you interested in COT analysis, I’ll try my best to give as much info about it as I can!

Let me answer your questions -->

Hyperfish
What a great question, very important -->
I would like everyone, who is interested in COT analysis, to know that this tool on its own is not enough. I think it can be used in two ways: one way as a signaling tool, the other way as a confirmation tool, but in both cases one should have a solid system for trading, a system that can help you enter and exit trades.

In my thread I do not wish to go in to any specific system recommendations... I would be narrowing down the usage of it (COT analysis) to one type of time frame and tactic, which could leave out other great trades on different time basis and different strategies. What I mean by this, is that there are traders out there, who might be trading on shorter time frame, for example only on forex or a trader who prefers options on metal markets and on a longer time frame (from few weeks up to a couple of months) and they will be viewing the specific “formula” from different angles.

A lot of traders out there still do not have an idea, or might not even heard about Commitments of Traders Report. My goal is to introduce them to it and teach them the basis of COT analysis. After that it is the challenge of each viewer of my thread to do his or her historical analysis and back test their system with the integrated COT report.

What I do believe is this: Using COT analysis integrated in a tested system can filter out some bad trades or it may focus one’s attention to trading opportunities that the existing system might not have found on its own.

I think of COT analysis as a “car-part” --> It is like a GPS navigation system, or the windshield etc… Like let’s say the MACD histograms or bar charts or EMA-s are wheels, door knobs etc… I would say that a car on its self cannot get from A to B with only the wheels or only the engine. But a good combination of these elements can make a good car and that will definitely get you from A to B.

Hyperfish, let me ask you to stick around, after a few post you should understand how I use the tools I have at my disposal. I should underline the very important fact, that I have found these tools roughly 8 months ago at the service where I have become a subscriber. Before that, I only used a visual method --> look at the charts and tried to “feel” the extremes. It was not a really mathematical approach, so less professional.

In the example on Soybeans, have a look at the column that says COT EXTR. In that report (17th) this indicator was showing an “All Time” extreme situation for Commercials and Large Speculators as well. This means, that these participants of the market have never in the past stood at those net levels --> Commercials were never so net short, while Large Speculators were never that net long. Of course this level of extreme can even grow larger for a few weeks, but one should understand that it is the stress level of the market that we are measuring and feeling… it’s a little bit like the volcano before erupting. Nobody knows when, but there are tools that can signal the stresses building up inside the mountain. So when you see that the stresses are getting higher and higher, you should get as far from the volcano as possible

Going back to the example and the All Time signal… The lines that I have drawn on the chart do not represent points in the market that I have taken a trade, it is just showing you the method of historical analysis, the way, I think one should analyze the past similar situations. Since at the time, when this 17th report came out this year, this was a very extreme picture. So what I would like to teach you is that you should look at the past similar situations and see what happened to the price of soybeans.

GnarlyPips
The report that you are referring to is the TIFF (Traders in Financial Futures) COT report type. Its publication at CFTC started in 2009. Honestly, I haven’t used this report type for analyzing the markets, but I have access to it (see attached recent report). I think it would be much appreciated, if you could talk a little bit about your experiences with the TIFF report.
The report type that I would like to focus on here in my thread, is the Classic or so called Legacy COT report. It has the longest history, thus you it could be used with the highest efficiency – I think, but correct me if I’m wrong.

aiyahmarkla
Thanks for the post. I think it is important for anybody interested in a new trading tool to try to find out as much information about it as possible, search for more sources, not just one.

I would not consider myself a pro, but I have used the Commitments of Traders report for some time now and have experiences that I wish to share with others. I would welcome other traders familiar with the report to join and share their thoughts about this report.

All the best,
Dunstan

EXTREME COT CHANGES
The title sounds similar to the previous, 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 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.

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.

thnks dunstan can this be expanded to FX? and how?

Only on those currencies, which have futures contract and corresponding COT report, these are: Australian Dollar, British Pound, Canadian Dollar, Euro, Japanese Yen, Swiss Franc, USD Index, Mexican Peso

Obviously if you trade one of these pairs, you should check both of them --> for example in case you want to trade GBP/JPY it is advised to check the Commitments of Traders report on both GBP and JPY.

I hope I could answer your question, let me know if you still have any left!

All the best,
Dunstan

We have come to the point where I have mentioned all the COT analysis tools that I use, so I would like to sum it up now in a few words:

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 signals 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!

Next week I would like to continue this topic with more recent examples. I am a follower of a so called „weekly COT review” on YouTube, and there they pick some markets where either the COT change was large or there was a COT extreme situation. I will try to give you a more detailed explanation about the markets that they analyze.

I hope you are enjoying this topic and if you are new to this Commitments of Traders report, I hope I could give you enough information to know better how it can be used for trading.

I welcome every new opinion or any other COT analysis tools that one might know of!

If you have any questions, feel free to ask, I promise that I’ll try answering them!

Have a great weekend,
Dunstan

Dunstan,


Yes indeed

Martin

What a great thread... looks like this could help a lot in my strategy!

Subscribed... please continue the good work, in all honestly I never really knew about the COT - but will do some reading and no doubt will be back with questions - hope you are around to help! :-)

Thanks

Oz