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Why do "large traders" and "commercial hedge traders" seem to go opposite directions
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Why do "large traders" and "commercial hedge traders" seem to go opposite directions

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Why do "large traders" and "commercial hedge traders" seem to go opposite directions

I am trying to understand the small chart at the bottom of this Finviz.com chart for the price of gold and lumber

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On the surface it seems clear enough that there are more Large trader contracts as the price of gold rises but commercial hedgers seem to have fewer contracts when Gold prices rise.....Please excuse my ignorance in this matter it might be that the the negative numbers for Commercial hedgers is simply to separate the lines

The above chart looks so "simple" to me...but when I look at Lumber pricing the small chart at the bottom is anything but regular but still Large traders and Commercial hedgers seem to be opposites.

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Any explanation of this chart is appreciated


Last edited by Underexposed; February 21st, 2014 at 05:12 AM. Reason: to add charts
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Hard to say without knowing where they get their numbers from, but I'll give it a try:

Commercial hedgers seem to be the guys with physical positions, which they then hedge on the futures markets, i.e. trying to reduce risk of price movements. At least it makes sense to me looking at the chart with having in mnd that there are physical positions behind the green line. The large traders take the other side of these trades, so they are the risk takers here. Theoretically their profits could be seen as a kind of insurence payment to them by the hedgers.
This however draws an oversimplified picture...

vvhg

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vvhg View Post
Hard to say without knowing where they get their numbers from, but I'll give it a try:

Commercial hedgers seem to be the guys with physical positions, which they then hedge on the futures markets, i.e. trying to reduce risk of price movements. At least it makes sense to me looking at the chart with having in mnd that there are physical positions behind the green line. The large traders take the other side of these trades, so they are the risk takers here. Theoretically their profits could be seen as a kind of insurence payment to them by the hedgers.
This however draws an oversimplified picture...

vvhg

So then the commercial hedgers take advantage of the higher prices to unload some of their physical holdings and replace them when the the price falls so they would be the mirror image of each other.

It would seem that a bottom to a down trend could be predicted as both large traders and commercial hedgers contract positions approach zero....sounds too simplistic to me though. Smaller traders don't do enough to have much of an effect

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Their motivations are fundamentally different. I think it makes sense really that they do mirror. Essentially the hedgers are taking a contra position to their expected primary holdings to ensure they are directionally neutral, where-as the large position traders are betting plainly on the expected direction. It's where they agree or where no clear pattern prevails that things get messy, because it likely indicates high levels of uncertainty.

I think there must be an indicator to be developed in there :-)


Last edited by sands; February 22nd, 2014 at 12:36 PM.
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Commitments of Traders (COT) reports used to be easier to divine, but now options are included and there are 'sub-reports' that include index funds. You're only looking at one type of report on the FINVIZ page. Also, I don't know if there's such a thing as a 'large trader' in the Lumber market since that is one of the lowest volume exchanged traded commodities -- it probably competes with Oats for the title.

Some resources:
- Dunstan, who is a member of this site, seems to follow COT reports pretty closely and he subscribes to the COTBASE service, which seems to be quite a bargain at 10 bucks a month or so.
- Look up Steve/Stephen Briese on the internet. He wrote a book about trading via COT signals and had a newsletter for at least 20 years (maybe he still does ... but I thought he retired and moved from Minnesota to Florida - smart guy!).

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Thanks to all

I have wondered about that chart for a long time and you have helped me sort it out.

Overall as a trader in stocks, I find FinViz a pretty good resource, I wish we had such a screener for Canadian stocks. There is some screening for Canadian stocks but only for those Canadian stocks that list on American exchanges.

I think that lower chart is far too simplistic to rely as it appears there...and I don't have the tools at present to follow it up more.

Big Mike's Trading forum is an amazing resource in itself. Nice to find a place where discussions are positive in nature. Thanks to those that responded

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The problem with the Commitment of Trader reports are their accuracy. Back in 2008 the CFTC reclassified Vitol from being a commercial hedger to non-commerical speculator. The result? An 10% shift in the report. Yes reclassifying one company resulted in a 10% change in the COT reports! Makes you wonder about how so many other companies are classified.

Reuters:- Big CFTC data revision raises oil traders' eyebrows

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I am trying to understand the small chart at the bottom of this Finviz.com chart for the price of gold and lumber

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.

On the surface it seems clear enough that there are more Large trader contracts as the price of gold rises but commercial hedgers seem to have fewer contracts when Gold prices rise.....Please excuse my ignorance in this matter it might be that the the negative numbers for Commercial hedgers is simply to separate the lines

The above chart looks so "simple" to me...but when I look at Lumber pricing the small chart at the bottom is anything but regular but still Large traders and Commercial hedgers seem to be opposites.

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Any explanation of this chart is appreciated

Those charts lines are net positions (longs-shorts) not contracts held. Also that is data from the Legacy COT report not the newer DCOT report.


Last edited by ron99; February 24th, 2014 at 01:08 PM.
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Any explanation of this chart is appreciated

OK, so here's a quick run-down for you. Large traders are making money from trading the market. Commercial hedgers don't use the markets to make money by making bets on price action (if they do, they lose their commercial status). They use markets to stabilize their cash flow. The commercials are made up of two groups - producers and consumers.

Example: Consumer: Say you run an airline, and fuel costs are historically low. You know that, if fuel costs rise, you will have to raise your prices and could lose business. So, you begin accumulating futures contracts in the appropriate markets before the price goes up. If the price does go up, the profits from the trade offset rising fuel costs and allow you to remain competitive. During the huge commodities run-up in '08, Southwest had done a great job hedging and this allowed them to beat their competition on price. If the price goes down, at that point the hedge was like an insurance policy that you never had to use.

Producer: Let's say you run a lumber mill, and the price of lumber has begun trending down off of historic highs. As a hedger, you would be selling futures contracts as the market continues down because that allows you to effectively lock in that higher price. You are selling your lumber for less and less, but the profits from the trade hedge that. If price turns back up, again, it's like an insurance policy you never cashed.

One caveat is that you need a good understanding of the fundamentals and structure of an industry to really put COT data in context. It is nothing that should give you trade location or act as a trigger. The commercials and the large speculators can remain divergent for a long time, and you need a LOT of money to play with these elephants.

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