Educational: How I use the CoT-Data to verify EW counts
Hi guys today I want to do a short educational on how I use the CoT-data to validate longer term EW counts. Normaly I update my CoT-Spreadheets on Sunday. But since we have been waiting for the data to be released for three weeks now, I have time to show you, how useful it can be.
Unfortunately my english writing skills have detoriorated over time but I guess that my charts will make the point.
I guess most of you have already heard about the CoT-Report and know what kind of data is report. So I go right in medias res.
When looking at the CoT-Data I first calculate the net positions of the three trader categories. Here in Tradingview you find community indicators, that can do that for you.
The idea is that large speculators are skilled traders that trade the trend. So when the market trend is up the net position of the large speculators should be long and in the best case increase from week to week. Usually the large speculators carry the largest net long position, when the trend is old and nearing the top.
Commercials normaly do the opposite. They try to hedge their business (consumer) or lock in high prices (producer). In normal circumstances they mirror the position of the large speculators.
So normaly you can follow the large speculator and profit form the market trend.
The CoT-data gets interesting, when we near a turning point and the positions of the large speculators and commercials reach extreme levels. The idea here is, that large specs even though they have a large portfolio their monetary resources are limited whilst the hedging commercials have bigger pockets.
When the position of the large specs reaches new highs one expect the trend to end because they have no more ammunition to ignite a further up or down move. On the other hand the commercials how know the fundamentals of the market can now ignite a move in the opposite direction.
That is the basic idea. So what I do is to compare the net positon with historical position. Therefore I calculate an index over the last 3 years. The formula is Index = 100 * (current net position - minimum net) / (maximum net - minimum net). The index ranges from 0 = lowest net (short) position in free years and 100 highest (long) position in three years.
When the index is above 80 or below 20 the market is ripe for a change in the larger trend. Unfortunately the CoT is only seldom a great instrument to time the market. Commercials can ride against the trend over extended periods. I know for sure, cause more than one time I had to close a position. But it is great as a filter or in combinination with EW or seasonality. When in a final wave 5 in either direction you want to see those extreme Index levels.
For those interested I will continue below. But now I want to drive home one of the most important points.
SPEED MATTERS! Commercials know the fundamentals of their market. And if they hastyly sell out and turn their position something big is going to happen. You can see this in the above chart of ES.
More recent I have a chart of Bitcoin, were you can see, that commercials act swiftly if they see an opportunity.
I produce a spreadsheet every week, were I calculate the current index value and the change from the week before and over 4 weeks. I hope that I that data will be released next friday so I can update. You can download the spreadsheet at https://docs.google.com/spreadsheets/d/1J7o1CenX2-rVQVmOqc_uCyP8kq44sMPh/edit?usp=share_link&ouid=103032635264731716788&rtpof=true&sd=true
In the spreadsheet you can also see the market bias. Market Bias is the net position of the large speculator minus the net position of the commercials. So if for example the large speculators are net long and the commercials are net short the net net position of the commercials will be added to the net position of the large speculator. The total balance then shows the amount of contracts in favor of the current trend. As with the index the change and speed of change is more important than the value itself.
I hope you enjoyed this and gathered some helpful information and I will come up with some new EW analysis next week. Have a great weekend.
Unfortunately my english writing skills have detoriorated over time but I guess that my charts will make the point.
I guess most of you have already heard about the CoT-Report and know what kind of data is report. So I go right in medias res.
When looking at the CoT-Data I first calculate the net positions of the three trader categories. Here in Tradingview you find community indicators, that can do that for you.
The idea is that large speculators are skilled traders that trade the trend. So when the market trend is up the net position of the large speculators should be long and in the best case increase from week to week. Usually the large speculators carry the largest net long position, when the trend is old and nearing the top.
Commercials normaly do the opposite. They try to hedge their business (consumer) or lock in high prices (producer). In normal circumstances they mirror the position of the large speculators.
So normaly you can follow the large speculator and profit form the market trend.
The CoT-data gets interesting, when we near a turning point and the positions of the large speculators and commercials reach extreme levels. The idea here is, that large specs even though they have a large portfolio their monetary resources are limited whilst the hedging commercials have bigger pockets.
When the position of the large specs reaches new highs one expect the trend to end because they have no more ammunition to ignite a further up or down move. On the other hand the commercials how know the fundamentals of the market can now ignite a move in the opposite direction.
That is the basic idea. So what I do is to compare the net positon with historical position. Therefore I calculate an index over the last 3 years. The formula is Index = 100 * (current net position - minimum net) / (maximum net - minimum net). The index ranges from 0 = lowest net (short) position in free years and 100 highest (long) position in three years.
When the index is above 80 or below 20 the market is ripe for a change in the larger trend. Unfortunately the CoT is only seldom a great instrument to time the market. Commercials can ride against the trend over extended periods. I know for sure, cause more than one time I had to close a position. But it is great as a filter or in combinination with EW or seasonality. When in a final wave 5 in either direction you want to see those extreme Index levels.
For those interested I will continue below. But now I want to drive home one of the most important points.
SPEED MATTERS! Commercials know the fundamentals of their market. And if they hastyly sell out and turn their position something big is going to happen. You can see this in the above chart of ES.
More recent I have a chart of Bitcoin, were you can see, that commercials act swiftly if they see an opportunity.
I produce a spreadsheet every week, were I calculate the current index value and the change from the week before and over 4 weeks. I hope that I that data will be released next friday so I can update. You can download the spreadsheet at https://docs.google.com/spreadsheets/d/1J7o1CenX2-rVQVmOqc_uCyP8kq44sMPh/edit?usp=share_link&ouid=103032635264731716788&rtpof=true&sd=true
In the spreadsheet you can also see the market bias. Market Bias is the net position of the large speculator minus the net position of the commercials. So if for example the large speculators are net long and the commercials are net short the net net position of the commercials will be added to the net position of the large speculator. The total balance then shows the amount of contracts in favor of the current trend. As with the index the change and speed of change is more important than the value itself.
I hope you enjoyed this and gathered some helpful information and I will come up with some new EW analysis next week. Have a great weekend.