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The Federal Government keeps tabs on all of
us who trade. SURPRISE!!!
Whenever we sell short...they know, whenever
we buy and go long...they know, whenever we buy options, either long or short,
again...they know!
This can be a good thing, because if they know
what everybody else is buying and selling, and then they tell you and me about it, that's
a good thing!
It's
good to know what everyone else is trading in the markets. It's kind of like
sitting at a table playing Gin Rummy and every time, just before its your turn,
the other players have to turn and show you their hand of cards. Now, given that information do you think you would be a better Gin Rummy
player? Absolutely, I think so! Okay, sure, you may not know what
the deck holds, or what the other players are going to do when its their turn,
but at least you know what hand they hold. That's what the COT is to
us as traders and that information can be an incredible resource in helping us formulate a
successful trading strategy.
Would you even want to venture
out and try to trade without knowing this information now that
you know it's available?
I must say, years ago, I never figured the
COT was of much value. The Feds used to only release the info to us once a
month, and it was for the previous months trades. Big deal right?
Who cares what everyone was trading last month? How does that help us in
our trading decisions today...right? Well, several years ago, they changed
their minds and started giving us this information on a weekly basis, which now
of course, is of a much greater value to us as traders!!!
(We here at Gecko Software
have been collecting that data now for a number of years and
have a lot of great historical data to work from and to practice
with.)
You see, the COT is broken down into three
categories, take a look at this example:
In this
graph, you will notice that we have three color bars, and one yellow line; this
is what they stand for:
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Red bars are the Commercial Traders.
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Example: Farmers, hedgers,
producers and factories.
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Blue Bars are the Large Speculators.
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Example: Banks and large
financial money managers.
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Green Bars are the small speculators.
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Yellow line is the overall open interest in the market.
Notice that
the red bars are all pointing down, which indicates that the commercials are all
selling, or going short. Notice that the Blue lines are all facing up,
which means the large speculators are buying, going long in the market.
Basically, the red guys, the big commercials are selling their contracts to the
blue guys, the big speculators. (Why is that? One might ask. We'll
cover that question in just a moment.) First, look at the little green
guys, they are the "small speculators," guys like you and me, who are also going
short, or selling, that's why their bars are all facing down too.
I hope this
quick explanation helps you understand how to read the indicator. Now here
are a couple of full sized charts so we can see a little more clearly how this
relates to you and me as traders.
But, before
we get started with the charts, I must say: My favorite thing about COT, is that
it is NOT based on market price whatsoever, its NOT like any other indicator
you've ever seen, it does NOT even take the markets price into
consideration. This is strictly an indicator that looks at what the largest industry
movers are doing, and then points it out to us! (Wow, now that's cool...)
Look closely, you should be noticing
something a little funny here...ask yourself this question. "Why are all
the commercials selling and going short during an obvious uptrend? Why are
all the Large Speculators going long? (That's obvious...right? Buy low,
sell high...that's the way we make money!) Well then why are all the small
speculators selling and going short?
Okay, let's knock these questions off one at
a time.
The Commercial firms are our producers, they
already own the product that we are trading here, such as a farmer, he already
owns the corn, it's sitting in the field ready to be harvested, therefore he's
already long multiple contracts of whatever product he's producing, in this
example, that's corn. Therefore, as the price moves higher, he wants
to take advantage of higher prices, and so he starts to "sell" his corn to the
market, therefore it reflects in the COT as going short, because he's "hedging"
his corn crop against the futures market, off laying his price risk to the
speculators; which are the blue/large and the green/small speculators.
Does that make sense? Let's clarify
just a little more: Let's say a
farmer has a crop of corn in the field which is equal to ten contracts of corn
on the futures market. Well, as prices move up and down, his corn crop or
his profit from the sell of his corn crop is effected by the up and down price movement of
corn...right? But since the farmer does not really have any corn yet,
since its still growing in the field, he can't really run down to the local
"grain elevator company" and sell his corn to them, not yet anyway, he's got to
wait until he harvests it.
When he does finally harvest his corn,
and takes it down to the grain elevator to sell, that's what we call
"selling on the cash market." The farmer sells his corn to the grain elevator at
whatever the going rate is at the time of harvest.
Well, what if its only July, and our farmer
is not going to harvest his corn until October, but he really likes the price of
corn today? Well, if he only sells his corn in the "cash" market to his
local grain elevator company, then he's stuck getting the price at the time of
harvest and the price of corn in July really means nothing to him. BUT,
if he thinks the price of corn will be lower in October than it is today, and he
wants to lock in today's price for the corn he's going to be delivering in
October, then he can go to the "futures" market and "sell" his October corn crop
at today's (July's) prices. The reason we call them the "futures markets,"
is because even though he sold his corn today, and got today's price for his
corn, he does not have to deliver it until October...and that's in the "future!"
Now, here's the big kicker! Who did he
sell his corn to? He sold it to either the Large Speculator, or he sold it
to a small speculator like you and me. Well, why would we buy the farmers
corn? We buy, or the large speculators buy the farmers corn in hopes that
the price of corn will continue to rise, and go higher. You see, we want
to buy low, and sell high! That's how we as speculators make money.
We make the difference between what we bought it for and what we sell it for,
and of course our purchases all take place only on paper, we do all of this
through the futures exchanges; we as speculators are never expected to make or
take actual delivery of the corn product itself.
You see, the farmer is happy that he sold you
his corn, because he feels like he got a fair price for his corn crop. You
are happy that you bought the corn, because you expect prices to continue
higher...buy low, sell high, you make money. That's the belief a
speculator works off of, don't get confused why the farmer is selling and the
speculators are all buying, that's the name of the game, they've both got
opposing interests, and that's why our free market economy works.
You see, the farmer is happy that he sold his
corn for two reasons:
First, he believes he got a higher price
for his corn today than what he could get for it if he waited until harvest,
when everyone would be selling their corn. If the supply of corn is
great, then prices go down, and the farmer knows that the supply of corn is
never greater than at peak harvest time. (Therefore being able to sell
his crop before peak harvest time can be a great advantage to a farmer.)
Second, now that he's sold his corn, he
has a budget for the following year that he can begin working off of.
He can now go to the store and begin purchasing the items he needs to
continue his farming operation; he has his budget and it is now set for the
following year.
Sidebar: Many farmers won't
sell all their corn at once, not if they think the price of corn may
continue higher. Remember back, when we said our farmer had
what amounted to ten contracts of corn in his field? Well, maybe
at first, he only sold one contract of his corn at today's prices.
As the price of corn continues to rise, he may sell off another one, and
if the price continues to rise, he might sell off another, and
another, and another, until he's sold all his corn. Continually
selling during an entire uptrend of the market. (In our COT
report, that's what makes it look like the "commercials" are all going
short during an up trending market.)
One last point which finalizes the entire
process. Who do you as the speculator sell your corn contract to when you
finally decide prices have moved high enough and you want to liquidate or get
out of your position and take profits? (or suffer your losses if prices dropped
below what you paid for it.) You sell your contract to either
another speculator, who expects to sell it higher than he's buying it from you for, or
you sell it to another "commercial" firm who's actually buying the product, in
our example here, who buys the corn, to put it to use, to consume it. (Of
course, you don't need to worry who is actually purchasing it, the exchange
handles that for you, you just simply sell it back to the exchange.) So
you see, there are commercials who both buy to consume, while others are selling to
liquidate inventory; then their are speculators like you and me who sit in the
middle of those two apposing sides. You
might ask, "Why do they need us at all then, whey don't the farmers just sell
their corn to the commercials who want to consume the corn?"
That's a great question! The answer is
"liquidity!" What if the farmer wants to sell his corn today, and the
large commercial consumer does not want to buy it until next month? The farmers stuck, with
no one to sell his crop to. So, we created exchanges, invited in the
speculators, who will take the risk from the farmers, hold the corn for a month
in contract until the large consumer wants to buy it. The speculator is then
carrying all the risk of price movement so the farmer doesn't have to, and of
course we as speculators take that risk in hopes of making money from the
difference of price over time.
There you have it, a complete description of
how and why the Commitment of Traders report works and how the commodities
markets combined with the cash market came about.
Take a look at this chart.
Can you see the Buy and the Sell
arrows/signals being generated on the chart above? Those are actually
coming from a formula derived from the Commitment of Traders. The formula
for these signals was created by a very good friend of mine; Mr. Jake Bernstein.
When I told Jake we were going to add the COT to Track 'n Trade, he kindly
offered us his formula for reading the COT and for deriving buy/sell signals
from it; we aply named his formula the "JBCOT Buy/Sell Indicator." After I had our programmers add
the JBCOT formula into Track 'n Trade Pro, I was
absolutely blown away! I was absolutely amazed at the accuracy of Jakes
formula; frankly, I was very surprised he let us include it in Track 'n Trade
Pro, it is
absolutely unbelievable!!! (Thank you Jake!)
Now remember, the COT does not take into
account the actual "price" of the market whatsoever, all we are doing is telling
you when the momentum of the largest industry players are changing direction in
their buying and selling power. We are in essence, with these buy/sell
arrows, showing you the hand of the other players. We are simply pointing
out when the momentum of the market is changing, and when the big boys are
changing from buying contracts to selling contracts or vice-versa; not in price,
but in time.
Here's another chart for you to scope out!
So, do you think this little gem could come
in handy? The commitment of traders requires an additional data feed to keep it
current, so we update it as soon as the report is posted by the Feds each
Friday. The data is downloaded directly into Track 'n Trade Pro along with your daily
market data update subscription service--quick and easy.
Okay, now here's some more of the
good stuff...
You ever been worried about being
caught in a limit move? I know I have. Just looking back
through history, I've noticed these classic examples of where the
large specs and the large commercials were jumping ship just before
a large limit move crash. How do they know? Amazing
isn't it. The JBCOT pointed it out to us, giving us plenty of
time to react.
Here's another classic example.
Here's one more for the road...
Yes, I must admit, I've been being asked for
several years to include the COT into Track 'n Trade Pro, and I kept putting it off,
and putting it off, delaying it for other projects and plug-ins.
For years, we kept
collecting, archiving, parsing, and storing the weekly data, we
just never bothered pulling it all together and just never took
the time to write the plug-in and data download mechanism; which
was, of course, the biggest step in bringing you this service.
Now that I've seen how awesome
this indicator is, I must again apologize for not bringing it out
sooner. I'm very
sorry, had I known it was going to work this well...I would have included it
years ago. So to all of you who have been continually asking for the COT
these past years,
I apologize, but here it is, finally, in all its glory. I'm just sorry it took so long to
include this unbelievable tool into Track 'n Trade Pro, and once again, thank you
Jake Bernstein for all your help in making sense of it all from a traders buy/sell
standpoint.
I invite you to pick up your copy or Track
'n Trade Pro, and the new COT plug-in, which includes the JBCOT buy/sell
formula.
Click
here
to review the order form.
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