Today we continue the series dedicated to the COT Report, in the previous article that you can find at this link:
The best use you can make of it is to integrate the data into indicators to have a more complete and summary view.
My broker has already integrated the COT data so different indicators can be created beyond what the platform itself provides.
The first 3 indicators that I show you are provided by the platform itself, they are very basic but they give us a lot of information, the last two or the 4 and the 5 I built them.
1 INDICATOR — COT TOTAL POSITION%
Here is a small example on an indicator that I use very frequently, it indicates the net positions in% of the three market players, as we said that on Friday the news is released this indicator makes sure that it is released on Wednesday for a purely visual question. but the data will always lag behind. In this case we see it in action on the Crude Oil Futures.
- Blue line → Commercial
- Purple Line → Non-Commercial
- Orange Line → Speculators
As you can see, most of the positions in this case are held by Commercials who have 71.5% of the market!
2 INDICATOR — COT TOTAL POSITION
If we don’t like it as a percentage, we can also rely on the numbers with the total open positions:
I don’t dwell much on this indicator as it gives the same information as the one above
3 INDICATOR — COT NET POSITION
Although the previous indicators are excellent, this does not allow us to know the positions well as we do not know how many positions are long or short. This is why this third indicator comes in handy:
With this indicator we can see which side of the market the operators are on.
For example, in this case there are Commercials which net of positions: Long — Short = the indicator gives a result of –272866.00 contracts, which means that they are almost short!
Now let’s take the weekly chart of this indicator:
As you can see, Commercials and Non-Commercials have a strongly opposite relationship and as a result these net positions are really very useful in understanding the trends of both major players, but we need to know where they come from.
For this reason we need a starting point with which to compare this information and understand how many, for example, of group A are Short on the total of their group and how many of Group B are short on the total of their group so as to have a clear trend of strength on how they are moving.
4 INDICATOR — COT Non-Comm Net Position Pct of Total
To overcome this problem we will rely on a special indicator.
This is based only on Non-Commercials (nothing prevents us from doing the same with Commercials) and gives us a very simple percentage indication.
Ex: if all Non-Commercial contracts are 1,000,000 and 600,000 are long, the indicator will tell us that 60% of them are in the long position.
But what happens if you go from 600,000 long positions to 400,000 and then to 300,000? In this case the long positions are decreasing and now they are entering more short positions, in this case we would like to take a look at where the direction is going!
5 INDICATOR — COT Non-Comm Net Change
And that is why this indicator helps us:
But what does it do?
It indicates the change from one period to another, i.e. how many contracts are moving in one direction or the other, this translates into a net change, so the indicator is just showing you the percentage change from one week to another, whenever you find green or red spikes it means that there has been a significant increase or decrease in the amount of contracts.
In practice, it shows us the colored spikes only if the change exceeds a certain threshold that you can set to your liking, in this case I set it to 5%.
TYPES OF APPLICATION
- It can be used as a directional guide or a filter for entry and exit times. It helps to identify the trend by knowing what the big traders are doing.
- Bullish– Non-Commercial traders are long or increase their long position. A negative net trade position is considered to be bullish
- Bearish — Non-Commercial traders are short or increase their short position. A positive net trade position is considered to be bearish.
- The net position skew can help identify weakness or strength in a trend.
- Flex points or reversals can signal highs or lows
As you have seen there are many ways to interpret and analyze the COT data, through them we can do a lot of things, being an algorithmic trader I have developed many systems that are based on these indicators that you will see in the next articles dedicated to this mini series.
Of course these indicators only work with the platform I use for Algorithmic Trading, but nothing prevents you from extracting the data from the COT Report and creating your own indicators with your programming languages!
For any information do not hesitate to contact me in the links below. I’m at your disposal.
See you in the next article!