Cot The Big Deal
When analyzing historical currency prices, we are limited to five variables - i.e., the opening price, high, low, closing price, and volume in a time series (hourly, daily, weekly, etc.) The same holds true for futures, with the exception that there is also the element of open interest, which is the total of all futures and/or open contracts entered into - not yet offset by a delivery, exercise, or transaction. The aggregate of all long open interest is equal to the aggregate of all short open interest. Open interest held or controlled by a trader is referred to as that trader's position.
As traders apply the various indicators available to them, like Bollinger Bands, RSI, Stochastic, etc., they are simply manipulating the same underlying data in an effort to make trading decisions. While the number of these manipulations is unlimited, the dataset itself is finite, never really being able to reveal any new, or more meaningful information. (Hence, the importance of pivots.) For futures trading, on the other hand, the COT reports provide additional and independent datasets for analysis.
The COT information is independent of price data, as COT data is not derived from it. As such, the COT metrics take on a whole new level of importance.
The COT reports contain a myriad of raw numbers, far too many for the average person to comprehend. It is just a maze of data, which in and of itself is terribly difficult to read and understand.
To simplify the process of understanding what all the numbers really mean, Barrie Lees has developed a very useful site, which portrays the COT database in a user-friendly manner.
Here is an example of the Swiss Franc:
1201
cornrri index spec index small index price perc tu o
1201
cornrri index spec index small index price perc tu o
- -32 -24 -16 -8 -1 8 16 24
date- weeks from jan 01
In the above COT chart for the Swiss Franc, you can see commercial (comm. index), non-commercial (spec index), and non-reportable positions (small index) nicely portrayed in graphical form. All the math is done for you. In other words, each respective line above is net of long and short positions for ease of reference. If all positions were summed together, you would have a straight line, since they would neutralize each other in total.
Spreads are not included in the COT graph since they are neutral (one spread = one long and one short contract). The total long positions will equal the total short positions for all three groups.
In the above chart, I have marked three spots X, Y, and Z. X denotes a period when the commercial traders were extremely long with their futures positions. Y was when they were extremely short, and then again at the spot marked Z. Where they are extremely long in these futures markets, you can reasonably expect futures prices to climb at some point in the next three months. Where they are short, price weakness is on the horizon. Futures prices invariably affect the spot market.
How you read the above chart in terms of time frame is by determining the number of weeks from January 1st, 2002, either plus or minus. For example, -24 is 24 weeks before
January 1st, 2002, which would put it at approximately June, 2001. You can see a bullish bias to the price of the Swiss Franc ("price perc") from that point on. Where you see the commercials extremely short with their positions, you can also see prices turning bearish beyond those points - Y and Z. Pretty powerful stuff. The commercial traders own the futures markets. They are those markets. Eighty per cent of the money in those markets is theirs. They trade thousands of contracts at a time. They have more money than you and I ever will put together. Ignore them at your peril.
If you would like to experience the simplicity of Barrie's site, head on over to his visitors site: www.orc.ca/~blees/visitors/trader.htm. You will see in front of you ~ 80 commodities. Select the one that you want, and it will take you to another page. There, click on the third green bar down from the top (on the left side of the page), and - walaa - you will see a graph that looks like the one above.
The data at the free "visitors" site is one month old, but it is a good gauge of what has been going on with your commodity - be it pork bellies or the Swiss Franc. If you would like to see more current data - i.e., the last month thrown into the mix - you can subscribe to Barrie's "subscribers" version of this site for a measly US$4.95 per month. There are other sites that charge an arm and a leg for similar information, but not in near as nice presentation format.
What I am showing you here is "gold." If you understand what I am telling you, you are well on your way to achieving a "reversal" in your trading fortunes. Remember, there is a direct connect between futures and the forex.
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