Part II. Trading Sentiment
Pipruit: Sir, I’m a bit frustrated, since you’ve talked much about importance of that COT report and so on. How can we translate all this crazy table of numbers formatted in the early 80s into information that we could use in trading…
Commander in Pips: After long thoughts I’ve decided to make your life a bit easier, since I’m aware of your grumbling about translating text tables into something that could be applied to trading. So, here is a great supporter for you – Timing Charts. It could be very helpful, since there is not much software, especially among Forex brokers that contains COT report charts. Also here you can look at chart of any futures you want – not necessary currency but stocks, bonds, commodities…
Since COT report comes on Fridays, i.e. weekly, it will be most useful for day traders and higher. So here is how it looks like:
Here is how we will analyze it. First, let’s start with green line that is the positions of large traders. We’ve said that large traders, since they are really large usually apply “follow the trend” strategy and gradually increase position with the trend. You can see the confirmation of that on the chart. In the middle of 2010 large traders’ positions were extremely short and gradually start to reverse to the long side. If you’ve bought there, you were able to get profit 2.5K pips, not bad ah? The same is true for the middle of 2011. Large traders’ positions hit extreme long value around 1.47 and then gradually start to turn toward the bear side. Now you see that this process is still under way.
So, what kind of conclusion we could make?
Large traders’ position could be used as a trend indicator
Of course, you will not catch a wolf for ears, and will not be able to enter the market right at extremes, but moves after this so significant, that even if you will enter on some retracement, you will be pretty happy with your profit.
Of course, this indicator should be combined with other tools of technical analysis, such as reversal patterns on long-term charts, trend shifting etc. In other words, it should be wisely built into an overall context of trading.
Also, very often large traders’ position starts to change a bit ahead of price action, at least before the major move in new direction. This is very useful.
Now let’s shift to commercial positions. You, probably notice that they are opposite to large traders’ one. Hedgers try to protect themselves from the current trend, while speculators want to join it, that’s why their positions are opposite. As you remember we’ve said that commercials are extremely bearish at tops and extremely bullish at bottoms. Hence our first task is to find such areas. I’ve marked them with yellow rectangles. You can see that when commercial positions have reached extremes, the market reverses very soon. So, commercial positions could be used as a potential reversal signal:
Of course, you will not catch a wolf for ears, and will not be able to enter the market right at extremes, but moves after this so significant, that even if you will enter on some retracement, you will be pretty happy with your profit.
Of course, this indicator should be combined with other tools of technical analysis, such as reversal patterns on long-term charts, trend shifting etc. In other words, it should be wisely built into an overall context of trading.
Also, very often large traders’ position starts to change a bit ahead of price action, at least before the major move in new direction. This is very useful.
Now let’s shift to commercial positions. You, probably notice that they are opposite to large traders’ one. Hedgers try to protect themselves from the current trend, while speculators want to join it, that’s why their positions are opposite. As you remember we’ve said that commercials are extremely bearish at tops and extremely bullish at bottoms. Hence our first task is to find such areas. I’ve marked them with yellow rectangles. You can see that when commercial positions have reached extremes, the market reverses very soon. So, commercial positions could be used as a potential reversal signal:
Commercial positions could be used as reversal signal
So, if commercial positions continue to climb higher while speculators positions fall lower and lower – we have to keep an eye on potential upward reversal. And vice versa – if hedgers increase their shorts and the total value is very close to extreme, while speculators increase their longs – it could be an early bell of a downward reversal. As we’ve said it’s almost impossible to catch the point of reversal, since it a bit blurred in time. To protect yourself, combine COT with other analysis tools, maybe it is even better to enter the market after the reversal has started already. In general, your task is to be with the large speculation, until you’ll see clear signs of reversal on the chart in combination with a commercial line extreme.
Commander in Pips: Well, this will take the same answer as “why does market turn?” Because nobody is at the other side. This is demand/supply balance. If large speculators extremely long, already, who’s buying? Who will support the upward pace of market by making more new purchases? Nobody. Since there is nobody who’s buying, hence sells are starting and the market reverses. The same is for extreme short positions.
Commander in Pips: Hm, as a rule, but not always. Probably I say it in opposite way – market extremes should be confirmed by sentiment extremes. That is correct. The opposite statement does not always hold.”
Technical issues of using COT data
Commander in Pips: Absolutely. This data, as you’ve understand correctly, is not normalized. In other words it means that those extremes that was 3-5 years ago will be just flat in nowadays. We have to adjust them in time, to get correct information. This happens because the market became bigger, since money supply is growing geometrically, the market value also grows.
Commander in Pips: Well, there are two different ways that could be useful.
1. Create a non-normalized indicator;
2. Create an index.
Anyway it will demand some sort of manual work. Let’s start from first point. Here you will have to re-read how we deal with Detrended Oscillator – just remember how to estimate critical areas for overbought and oversold here.
Commander in Pips: That’s right, but you need to experiment with the number of periods – probably you will need more periods, since highs and bottoms on sentiment appears more rarely than on market. Probably you will need data for 3-5 previous years. But I want to make your work a bit easier, so that you will not have to deal with both commercial and large traders’ data, you may use their difference:
In fact, the shorter time frame you use for taking highs and lows of COT data – the more signals you will get, but the more often these signals will fail, since they are not solid extremes. If you will take larger time for data calculation, as we’ve said 3-5 years, then you will get fewer signals but they will be more reliable.
Since short positions are negative numbers, this indicator will surplus absolute values of them either with plus (Long Large + short Commercial) or with minus (Short Large + Long Commercial).
Then acts as with DOSC.
The second way to deal with it is to normalize it within some rage. In this case you will get something that will look like an oscillator. Let’s call it as FPA COT Oscillator:
Find the minimum (most negative) and maximum (most positive) COT Indicator values for predefined time period, say 3-5 years:
COT OSC = (COT Indicator value – MIN COT Indicator Value)/(MAX-MIN COT Indicator value)*100.
In will look like 0-100 ranged line. When indicator will reach 95-100, it will mean that we have to be aware of downward reversal and await Sell reversal patterns on daily – weekly charts. If oscillator will reach 0-5 value, we have to be ready for upward reversal.
The major thing here is –
Here is some more information about COT data. Also, you will find codes for the MT4 Indicator here
Small Add-on with huge sense
Commander in Pips: Ok, and finally a small add-on – the algorithm of a small check – will reversal appear to be truth or not. As you remember we’ve said that not every extreme in COT data leads to reversal. So, let’s discuss why it happens like this.
But first, answer me on one question – when reversal is more probably going to happen, when total non-commercial short 42 076 contracts or when 123 452 contracts?
Commander in Pips: And how do you estimate that there are fewer buyers. I’ve told nothing about long position…
Commander in Pips: That’s right son. Here is your question. You do not know the total position – as long as short. That’s why you can’t say what is better for reversal 46K or 123K, since you do not have foundation point – relatively to what?
So, let’s resolve this problem. For that purpose we need futures only COT Report (still we will have to deal with some numbers) and two numbers:
1. Non-Commercial short – all
2. Non-Commercial long-all
Having this numbers you can calculate how strong large speculators bearish or bullish in percent. All that you have to do is to calculate next indicators:
% Non-commercial Long = Non-commercial Long/( Non-commercial Long+ Non-commercial shorts)*100
% Non-commercial Short = Non-commercial Short/( Non-commercial Long+ Non-commercial shorts)*100
What it could give us? Simple – we can understand how much in % speculators are short or long, despite of actual number. For instance, knowing that 123K are short contracts does not mean a reversal if they are just 60% of overall position. Quite other conclusion you may get, if, say, the same 42K short of contracts are 85% of overall position. Other words, it’s better to check your thoughts with relative numbers rather than just actual one. Do you get the idea?
Commander in Pips: Ok, let’s check the real example. This is GBP futures chart. I’ve marked with yellow rectangle two different areas, that have quite different value of Non-commercial positions, but reversal happens in both of them, how this could happen?
First area in 2005 and COT report for November 22, 2005 shows:
Non-Commercial short – all = 42076
Non-Commercial long-all = 9056
So, % Non-commercial Short = 42076/(42076+9056)*100 = 82.28%
Second area in 2007 and COT report for July 27, 2007 shows:
Non-Commercial short – all = 25 086
Non-Commercial long-all = 123 452
So, % Non-commercial Long= 123 452/(123 452+25 086)*100 = 83.11%
Pipruit: Amazing!
Commander in Pips: See? In 2005 extreme was 3 times lower, but reversal has taken place anyway. The reason is relative value but not the absolute number. Oh, yes – here we’ve compared opposite reversals, but I hope you’ve got the point?
Commander in Pips: Ok, that’s all about Sentiment analysis, trading it and COT report. It’s very useful – do not ignore it.
So, if commercial positions continue to climb higher while speculators positions fall lower and lower – we have to keep an eye on potential upward reversal. And vice versa – if hedgers increase their shorts and the total value is very close to extreme, while speculators increase their longs – it could be an early bell of a downward reversal. As we’ve said it’s almost impossible to catch the point of reversal, since it a bit blurred in time. To protect yourself, combine COT with other analysis tools, maybe it is even better to enter the market after the reversal has started already. In general, your task is to be with the large speculation, until you’ll see clear signs of reversal on the chart in combination with a commercial line extreme.
Pipruit: And why it happens in such a manner? Why does the market turn when speculators and commercials reach extreme positions?
Pipruit: I see. So, now we say that extreme in market sentiment is a signal of market reversal, right?
Commander in Pips: Hm, as a rule, but not always. Probably I say it in opposite way – market extremes should be confirmed by sentiment extremes. That is correct. The opposite statement does not always hold.”
Technical issues of using COT data
Pipruit: Well, here is another problem. I’ve slightly experimented with COT data, and found out that we can’t estimate absolute extreme for positions. Am I right?
Commander in Pips: Absolutely. This data, as you’ve understand correctly, is not normalized. In other words it means that those extremes that was 3-5 years ago will be just flat in nowadays. We have to adjust them in time, to get correct information. This happens because the market became bigger, since money supply is growing geometrically, the market value also grows.
Pipruit: So, how we can apply it then?
Commander in Pips: Well, there are two different ways that could be useful.
1. Create a non-normalized indicator;
2. Create an index.
Anyway it will demand some sort of manual work. Let’s start from first point. Here you will have to re-read how we deal with Detrended Oscillator – just remember how to estimate critical areas for overbought and oversold here.
Pipruit: Oh, I think I’ve got it! We need some numbers of COT data first. With analogy to DOSC, I suppose for 120-130 previous weeks. Then we have to choose average most high and most low among them, and use them as extreme points!
Commander in Pips: That’s right, but you need to experiment with the number of periods – probably you will need more periods, since highs and bottoms on sentiment appears more rarely than on market. Probably you will need data for 3-5 previous years. But I want to make your work a bit easier, so that you will not have to deal with both commercial and large traders’ data, you may use their difference:
COT Indicator = Net Large positions – Net Commercial
In fact, the shorter time frame you use for taking highs and lows of COT data – the more signals you will get, but the more often these signals will fail, since they are not solid extremes. If you will take larger time for data calculation, as we’ve said 3-5 years, then you will get fewer signals but they will be more reliable.
Since short positions are negative numbers, this indicator will surplus absolute values of them either with plus (Long Large + short Commercial) or with minus (Short Large + Long Commercial).
Then acts as with DOSC.
The second way to deal with it is to normalize it within some rage. In this case you will get something that will look like an oscillator. Let’s call it as FPA COT Oscillator:
Find the minimum (most negative) and maximum (most positive) COT Indicator values for predefined time period, say 3-5 years:
COT OSC = (COT Indicator value – MIN COT Indicator Value)/(MAX-MIN COT Indicator value)*100.
In will look like 0-100 ranged line. When indicator will reach 95-100, it will mean that we have to be aware of downward reversal and await Sell reversal patterns on daily – weekly charts. If oscillator will reach 0-5 value, we have to be ready for upward reversal.
The major thing here is –
TO NOT FORGET UPDATE COT DATA AFTER EACH NEW RELEASE ON FRIDAY
Here is some more information about COT data. Also, you will find codes for the MT4 Indicator here
Small Add-on with huge sense
Commander in Pips: Ok, and finally a small add-on – the algorithm of a small check – will reversal appear to be truth or not. As you remember we’ve said that not every extreme in COT data leads to reversal. So, let’s discuss why it happens like this.
But first, answer me on one question – when reversal is more probably going to happen, when total non-commercial short 42 076 contracts or when 123 452 contracts?
Pipruit: Commander, that’s obvious – of course in the second case, since there are more amount of short traders and fewer buyers left.
Commander in Pips: And how do you estimate that there are fewer buyers. I’ve told nothing about long position…
Pipruit: Well, I’ve just thought…heh, I don’t know why I’ve decided that…
Commander in Pips: That’s right son. Here is your question. You do not know the total position – as long as short. That’s why you can’t say what is better for reversal 46K or 123K, since you do not have foundation point – relatively to what?
So, let’s resolve this problem. For that purpose we need futures only COT Report (still we will have to deal with some numbers) and two numbers:
1. Non-Commercial short – all
2. Non-Commercial long-all
Having this numbers you can calculate how strong large speculators bearish or bullish in percent. All that you have to do is to calculate next indicators:
% Non-commercial Long = Non-commercial Long/( Non-commercial Long+ Non-commercial shorts)*100
% Non-commercial Short = Non-commercial Short/( Non-commercial Long+ Non-commercial shorts)*100
What it could give us? Simple – we can understand how much in % speculators are short or long, despite of actual number. For instance, knowing that 123K are short contracts does not mean a reversal if they are just 60% of overall position. Quite other conclusion you may get, if, say, the same 42K short of contracts are 85% of overall position. Other words, it’s better to check your thoughts with relative numbers rather than just actual one. Do you get the idea?
Pipruit: Sure. This is really important.
Commander in Pips: Ok, let’s check the real example. This is GBP futures chart. I’ve marked with yellow rectangle two different areas, that have quite different value of Non-commercial positions, but reversal happens in both of them, how this could happen?
First area in 2005 and COT report for November 22, 2005 shows:
Non-Commercial short – all = 42076
Non-Commercial long-all = 9056
So, % Non-commercial Short = 42076/(42076+9056)*100 = 82.28%
Second area in 2007 and COT report for July 27, 2007 shows:
Non-Commercial short – all = 25 086
Non-Commercial long-all = 123 452
So, % Non-commercial Long= 123 452/(123 452+25 086)*100 = 83.11%
Pipruit: Amazing!
Pipruit: Absolutely, I’m not confused with that. Thanks, that really helps.
Commander in Pips: Ok, that’s all about Sentiment analysis, trading it and COT report. It’s very useful – do not ignore it.
Comments
A
ahmad ashraf
11 years ago,
Registered user
dear sir,
i have a question about this topic when we see the euro globex in 5years range we see that at this time large is -157,546 and it creates a new low -171,347 and now at the time rsi14 is at 72.63 and a divergence on macd.
these all are on weekly timeframe so according to cot data the divergence could be of 700pips more to build power again to down so we have to buy on a dip and if we trapped in wrong position for 200/300 pips than no worry market market have to move up according to cot.
your answer will be very helpful.
thanks
i have a question about this topic when we see the euro globex in 5years range we see that at this time large is -157,546 and it creates a new low -171,347 and now at the time rsi14 is at 72.63 and a divergence on macd.
these all are on weekly timeframe so according to cot data the divergence could be of 700pips more to build power again to down so we have to buy on a dip and if we trapped in wrong position for 200/300 pips than no worry market market have to move up according to cot.
your answer will be very helpful.
thanks
Sive Morten
11 years ago,
Registered user
> dear sir,
i have a question about this topic when we see the euro globex in 5years range we see that at this time large is -157,546 and it creates a new low -171,347 and now at the time rsi14 is at 7..
Hi Ahmad,
Actually I do not see any divergence with MACD on weekly EUR/USD, and can't either support or deny link between technical indicators, such as RSI and COT report. If you have such relation - please share with us. Personally I never study this potential relation.
That's why I do not quite understand why have you decided that it should be 700 pips more move before reversal?
Also it is better, probably to use relative ratio of "Large" to overall positions, rather than absolute numbers, as we've described.
i have a question about this topic when we see the euro globex in 5years range we see that at this time large is -157,546 and it creates a new low -171,347 and now at the time rsi14 is at 7..
Hi Ahmad,
Actually I do not see any divergence with MACD on weekly EUR/USD, and can't either support or deny link between technical indicators, such as RSI and COT report. If you have such relation - please share with us. Personally I never study this potential relation.
That's why I do not quite understand why have you decided that it should be 700 pips more move before reversal?
Also it is better, probably to use relative ratio of "Large" to overall positions, rather than absolute numbers, as we've described.
T
thierrybl
11 years ago,
Registered user
Hi Sive,
Thanks a lot for this very valuable lesson. If I understood right, when Large traders are mainly short, we should see an upward move.
Large was at -157000 last week and -140000 this week. They never reach that level of short ! %Large short = 84.31%.
So we can logically expect a massive bullish move. Am I right ?
Thanks a lot for sharing your experience.
Thierry
Thanks a lot for this very valuable lesson. If I understood right, when Large traders are mainly short, we should see an upward move.
Large was at -157000 last week and -140000 this week. They never reach that level of short ! %Large short = 84.31%.
So we can logically expect a massive bullish move. Am I right ?
Thanks a lot for sharing your experience.
Thierry
Sive Morten
11 years ago,
Registered user
> Hi Sive,
Thanks a lot for this very valuable lesson. If I understood right, when Large traders are mainly short, we should see an upward move.
Large was at -157000 last week and -140000 this week. Th..
Yes, most times it looks so. Now we already have some pullback on weekly chart. But extreme numbers not always lead to reversal and long-term opposite move. They can become a reason of some retracement.
Thanks a lot for this very valuable lesson. If I understood right, when Large traders are mainly short, we should see an upward move.
Large was at -157000 last week and -140000 this week. Th..
Yes, most times it looks so. Now we already have some pullback on weekly chart. But extreme numbers not always lead to reversal and long-term opposite move. They can become a reason of some retracement.
S
Suhi
11 years ago,
Registered user
Hi Sive and Everyone !
This is my first comment on this side , and i am very thankful , you have helped me a lot .
I went through almost all the lessons and they are great , providing significant help !
This one really caught my attention , and i have been trying to make this indicator work but since i do not have too much experience with mt4 or with programming , i was hoping someone could help me through with getting this indicator work .
My first problem , after i have all the files in the right place , i can not dowload any updated data in this .csv format , and i suspect that i will have to download the .csv for every instrument i want to use , so can you suggest some source or send the data which is required by email ? ( suhiadamfx@gmail.com )
Thank you and have a pip filled day !
This is my first comment on this side , and i am very thankful , you have helped me a lot .
I went through almost all the lessons and they are great , providing significant help !
This one really caught my attention , and i have been trying to make this indicator work but since i do not have too much experience with mt4 or with programming , i was hoping someone could help me through with getting this indicator work .
My first problem , after i have all the files in the right place , i can not dowload any updated data in this .csv format , and i suspect that i will have to download the .csv for every instrument i want to use , so can you suggest some source or send the data which is required by email ? ( suhiadamfx@gmail.com )
Thank you and have a pip filled day !
Sive Morten
11 years ago,
Registered user
> Hi Sive and Everyone !
This is my first comment on this side , and i am very thankful , you have helped me a lot .
I went through almost all the lessons and they are great , providing significant..
Hi Suhi,
Programming is not a strong side of mine, and actually, I do not use indicator for MT 4, because data updates weekly and this is sufficient to just calculate numbers and take look at Timing Charts page.
But, try to search on other our forums where programmers discuss their topics.
This is my first comment on this side , and i am very thankful , you have helped me a lot .
I went through almost all the lessons and they are great , providing significant..
Hi Suhi,
Programming is not a strong side of mine, and actually, I do not use indicator for MT 4, because data updates weekly and this is sufficient to just calculate numbers and take look at Timing Charts page.
But, try to search on other our forums where programmers discuss their topics.
Table of Contents
- Introduction
- FOREX - What is it ?
- Why FOREX?
- The structure of the FOREX market
- Trading sessions
- Where does the money come from in FOREX?
- Different types of market analysis
- Chart types
- Support and Resistance
- Candlesticks – what are they?
- Mysterious Fibonacci
- Introduction to Moving Averages
- Bollinger Bands
- Leading and Lagging Indicators
- Basic chart patterns
- Pivot points – description and calculation
- Elliot Wave Theory
- Intro to Harmonic Patterns
- Divergence Intro
- Harmonic Approach to Recognizing a Trend Day
- Intro to Breakouts and Fakeouts
- Again about Fundamental Analysis
- Cross Pair – What the Beast is That?
- Multiple Time Frame Intro
- Market Sentiment and COT report
- Dealing with the News
- Let's Start with Carry
- Let’s Meet with Dollar Index
- Intermarket Analysis - Commodities
- Trading Plan Framework – Common Thoughts
- A Bit More About Personality
- Mechanical Trading System Intro
- Tracking Your Performance
- Risk Management Framework
- A Bit More About Leverage
- Why Do We Need Stop-Loss Orders?
- Scaling of Position
- Intramarket Correlations
- Some Talk About Brokers
- Forex Scam - Money Managers
- Graduation!