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Trading against the 90% that lose! Contrarian COT Index and Retail Positioning Analysis

Courtesy of Pivotfarm

The Commitment of Traders Report is created by the CFTC – The Commodity Futures Trading Commission and is published weekly every Friday. This body gathers and publishes the open futures positions on all publicly traded US futures contracts as well as the corresponding options. The data consists of 3 main categories.

Commercial Traders – These are the bigger players in the markets, the smart money and consist of large firms that actually use the commodity being traded, includes companies like…BP in the Oil and Gas Market, Nestle in the Cocoa and Sugar market. The main function of these traders is to hedge the price of the commodity that they trade in.

Large Speculators – These consist primarily of commodity fund traders and are mainly trend following. The position sizes of these traders tends to be in tandem with the movement of price.

Small Speculators – The little guys, individual traders and small firms, these are the traders that tend to be wrong in the market at the tops and bottoms of markets.

How do we use this data? We believe that the COT Index offers a good indication of market sentiment and future direction. The key is to follow the smart money (Commercial) and trade against the other 2 groups when they are at an extreme.

Extremes in the data are figures below 30.00 and above 70.00. The ideal situation for a short position is a low reading in the Commercial COT and high readings in the Large and Small trader numbers. For example the Commercial COT Index reads 5.97, this means that the net commercial position is strongly biased to the short side. The Large and Retail (our main contrarian focus) are reading 97.70 and 100.00 respectively, meaning they are the most long side biased they have been in the last 6 months. For traders this means that their focus should be on short side trades, the goal is to follow the commercial traders.  This is the ideal alignment of the groups for optimum success.

This weeks COT Index Review

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e-mini S&P 500: Optimism  in the S&P COT has remained and has been strengthened further. Commercial traders as a group are net long by the highest amount in 6 months. Large and Retail traders on the flip side, seem to be affirming their short positions, overall Bullish strength remains strong. This view is further compounded by the Nasdaq COT which is also very bullish. Get Long, Stay Long! Says the COT

Signal: Bullish

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EURUSD: Commercial traders have remained consistent on the short side. The only surprise is a weakening in the Small trader long strength which is now mid ranged according to the net COT position. Ideally we would prefer the smaller retail traders to have a stronger long position. However the net bias remains firm to the downside.

Signal: Bearish

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GBPUSD: The strength of the Commercial short position has been weakening in the last couple of weeks. With all groups heading towards more neutral ground. The overall view is still bearish with Commercials short and larger traders long, as with the euro the pound is seeing a more neutral small traders position

Signal: Bearish

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USDJPY: Commercial traders remain firmly short this pair, with large and small traders taking a very opposing view. Bias for the USDJPY still remains very bearish. (This was our opinion from last week, very little has changed)

Signal: Bearish

Retail Trader Position Analysis

Also known as the Long-Short ratio this is a tool primarily offered by Forex firms, we haven’t been able to come across the same data in the futures as yet. The data is based upon the collective trades and trading direction of many thousands of retail traders (the average Joe). This group of traders is notoriously wrong at predicting market direction, market tops and bottoms with some simple analysis we can look at this data and take a contrarian view, for example if over 70% of retail traders are long USDJPY this offers us ashort bias. Savvy traders should then be focusing there energies on short side trades.

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USDJPY: Short. Short. Short. Retail traders have been getting increasingly long this pair for a long while now. Stay short.

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EURUSD: Retail positioning in the Euro remains fairly neutral

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GBPUSD: Retail positioning in the pound remains neutral again this week 

Pivotfarm – The Home of Support and Resistance Trading


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Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

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