Are You Looking for a Readable and Accurate Commitment of Traders (COT) Sentiment Indicator Based On Real Open Interest Data?
Trade With the Market Movers, Not Against Them!
The Most Comprehensive and User Friendly COT Data in the Market
Commitment of Traders (COT) reports give us a view into the trading books of the most influential traders in the market!
Once we know what these guys are doing, it is easier to eliminate the noise. Remember, the volume of money placed on one side of the market will tip the price towards that direction. This is supply and demand in play. Reports show an open interest separately for reportable and nonreportable positions.
For reportable positions, additional data is provided for commercial and noncommercial holdings, spreading, changes from the previous report, percent of open interest by category, and numbers of traders. Our focus will be on commercials (hedgers) and non-commercials (speculators). The most important fact is, these two groups have to carry out a lot of trading for CFTC to consider them in the report.
Open Interest is the total number of outstanding contracts that are held by market participants at the end of each day.
For example, if both parties to the trade are initiating a new position (one new buyer and one new seller), open interest will increase by one contract. If both traders are closing an existing or old position (one old buyer and one old seller) open interest will decline by one contract.
The third and final possibility is one old trader passing off his position to a new trader (one old buyer sells to one new buyer). In this case, the open interest will not change.
Increasing open interest means that new money is flowing into the marketplace. Traders open new positions and create a new transaction. The result will be that the present trend ( up, down, or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end.
Hedgers are producers and consumers of a commodity, the lower the price goes the more consumers buy (low raw material cost) and the less the producers are willing to sell which causes the demand and supply imbalance and vice versa, the higher the price goes the more producers sell and the fewer consumers buy and again we have supply-demand imbalance. On the other hand, speculators accept the risk from hedgers and create market liquidity. Simply put, excessive hedging positions most of the time create top and bottom of markets and speculators are trend followers.
Most of them discount the Commitments of Traders report as a functional leading indicator. They are of the opinion that the data reported lags three days hence is invalid. Everyone sees the report in the same day and on the other hand, it takes time for big traders to accumulate or distribute. And also knowing about medium to long term sentiment in the markets can help intraday traders to manage their risks more efficiently.
There are many ways to measure supply and demand in the market. But Commitments of Traders is by far the most accurate tool I know.
The method of the market analysis using the Commitments of Traders Report can be considered as fundamental analysis. Fundamental analysis itself hasn’t found a wide application for traders.
It’s no secret that most traders use technical analysis for real trading.
Why is that?
This is due to the fact that fundamental analysis is often connected with the economic news release, and it’s impossible to predict the market reaction to the news because traders have limited knowledge of finance and macroeconomics. Many traders default to technical analysis as a core of their trading. These large traders have the best teams to assess the fundamental conditions of markets, let them do the analysis and we follow them. All in all, they are market movers!
Ok ! That is a long description about COT, but how the data looks like?
Look at these two examples from cftc.gov. One is Gold as a commodity and the other is British Pound as a financial asset.
But there is a problem! Everything is in numbers! and what about the history of traders’ positions? How can we know about the smart money trading behavior?
The best thing is to make graphs and charts to visualize the COT and we can use mathematical and statistical methods to study their behavior.
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Now that everything turns into graphs, studying traders behavior is much easier.
Let us talk about some rules about inferring COT:
- COT is a tool to measure the sentiment, it is not a timing tool. You have to use technical analysis to find the best timing for entering and exiting your trades.
- There are two types of traders in the market, hedgers and speculators (commercials and non-commercials). As retail traders we have to follow the speculators and trade against the hedgers.
- Most of the times extreme hedging positions occur on top and bottom of markets.
- When there are extreme speculative short positions it is highly likely that the speculators begin short covering which creates demand and vice versa, when there are extreme speculative long positions speculators may begin liquidation which creates supply.
- Speculators accept the risk from hedgers and they are forced to trade everyday. We have the opportunity to wait for the best time to enter.
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Index
A mathematical tool to measure the traders’ sentiment
Index Extreme
Finding extremes in traders’ sentiment
Movement
A statistical tool to measure any abnormal change in traders’ positioning
Spread
Study if trader’s have strong trending or ranging bias
Concentration–Clustering Position Size
Study concentration and clustering in a single chart
Net open interest and number of traders
You can find the following items in net OI bar chart
Profile and histogram
Profile chart gives you a perfect insight into traders’ positioning
Inflexion
Finding mismatches in positioning
Open Interest
Finding out if the market is crowded or not and who has the most interest.
In Top and Bottom three charts you can find in what markets the biggest traders are mostly interested and also in what markets they are not interested. There are top 3 long and short interest based on concentration and clustering.
At a glance, you can find the markets in which big traders are on extremes based on the one-year index. Whenever a market stands on red area it means price may reverse and turn bearish or there would be a bearish correction and vice vera, blue areas mean price may reverse and turn bullish or there would be a bullish correction. The size of each bubble represents the traders’ average positioning. The higher the average positioning the more impactful their liquidation/short covering on price. The bubbles’ color represents price index relative to the past year (one year stochastics indicator). Red: below 20%, Dark blue: above 80%, orange: between 20-50%, light blue: between 50-80%.
We have two index charts, one for longs and one for shorts and the other one for net data. Consider longs and shorts for your analysis and use net index chart to see if markets are on extremes on net basis as well.
Consider market context and price action for your timing for entering, exiting or managing your trades, as COT is a bias tool.
Use the profile chart to quickly identify in what markets big traders have used most of their power and are overbought/oversold. Red areas mean it is highly likely the traders will liquidate and price may fall, vice versa blue areas mean it is highly likely the traders will cover their short and price rallies.
It does not mean new traders will not come into the market, but it is not very likely. We are talking about very large traders. Profile chart shows how much power they had to go long or short historically.
Consider market context and price action for your timing for entering, exiting or managing your trades, as COT is a bias tool.
Quickly find in which markets we have positioning mismatch (inflexion).
The higher the net concentration and the higher the net number of traders, the stronger the inflexion.
Inflexions are not continuation or reversal signals, but something is about to happen.
Consider market context and price action.
Movements charts show you in which market big traders are overbought/oversold based on past three years positioning data (Net STD). You can use it alongside the index chart. Also, you can find in which markets traders had abnormal change in positioning (Net Movement, Longs Movement and Shorts Movements). Anything beyond 2 standard deviation is abnormal and we have to note that.
This chart shows which markets are crowded and which markets are uncrowded based on total open interest.
