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I have a question about the COT, in particular about the commercial trading patterns.
As I read at the link below Sentiment Indicators - Learning Center
"Commercial traders [...] have a preference to buying on weakness and selling into strength (negative-feedback or counter-trend trading). They are trading without emotion, as they are hedging risk, long-term, and only change positions when the price deviates a lot from what theiy consider fair value. The typical commercial trading pattern is to average down in a bearish market (or up, in the case of an up-trending market). There seems to be uniform agreement that the commercials (hedgers) are the group that determines the direction of prices. These market participants have very deep pockets, in the sense that they can endure positions against market trends for a long time. The COT report gives us an idea about the trend for a particular asset class and tells us what the big money is doing.
In order to spot for market turns we shall pay attention to this category because commercials are typically most bullish at market bottoms and most bearish at market tops. They don't do this because of a contrarian approach but rather because they are hedging"
Can anyone give a simple example on how it works? Thank you very much
Can you help answer these questions from other members on NexusFi?
@Gianni78bari to see this in action, you may want to take a look at Nat Gas COT as an example. Commercials are heavily long right now, while Nat Gas is nearing 20 year lows.
According to the logic of the article you're referencing, this could be signaling a market bottom.
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Ironbeam Futures
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Hi Gianni & Ironbeam , I keep a very close eye on COT due the big trends that can arrive from very stretched positioning.
Once positioning gets very one-sided, I keep a lookout for signs of exhaustion (basing or topping patterns) and once I get a setup, i know that there is a potential for a prolonged trend move as speculators are caught with their pants down :-)
A currrency pair that responds well to COT is in my opinion GBP/USD (see attachment..every time sentiment gets too extreme we see a reversal.
The bottom of the chart shows commercial positioning and every time they accumulate big positions they usually get it right.
I will try to (please note, I didn't read your link yet but there are two good books on the subject and I read one of them...it was discussed in one topic a couple of months ago...so it is also my advice if you want to get serious about it to read a good book on the topic).
I think Sugar 11 is a good example but of course COT is very difficult for getting the right timing, it is more a signal on to be ready to act but it can last months...and needs weekly review...
So for the Sugar 11 if you look at the upper graph in green light, commercials were buying, the price was lower and lower, and it was at the upper range for a 3 year period (see lower graph on COT index) then they start to sell and the price went up as at the same time money managers went buying. I made a donation to the site mentioned so I encourage others to do the same so that we can keep it available...
Another example in the other direction: Cocoa US
Commercials (green light) were selling and were at record low (in terms of net contract) for a while, it is a 3 year COT displayed. The COT index was as well at record low for the commercials (lower display).
Then after a while, commercials are buying again and prices are going lower
Thank you for your useful posts. I'm studying the COT BIBLE by STEPHEN BRIESE. There are many of these concepts and more (e.g. ROC of commercials positions)
As I like this topic I started reading: 'Trade Stocks and Commodities With the Insiders - Secrets of the COT Report from Larry Williams. So far I can recommend it as well.
