Today I would like to share with
you an approach which can be utilized to prepare our trading strategies for
reversals. And in order to do this I’ll use Commitment of Traders report as
our primary tool. Please note that this approach is applicable for
identification of reversals of the long lasting trends – the ones which could
exists at least several months or even years. We will use the EURGBP pair as an
example of how to do this and to show where the COT report can be useful.
First, in order to analyze
current state of the pair we’ll use not only one but two COT reports. Because the EURGBP pair actually contains
information of two currencies – EUR and GBP – we will use COT reports for Euro
Fx (COT market code 099741) and British Pound (COT market code 096742). We’ll
be using the COT reports which represent Commercial/Non-Commercial/Speculators
net positions. And we’ll be focusing only on Commercials – as they are the
forces who drive the market.
So now, let’s look at the chart
and analyze first case – Case 1:
around July, 15th, 2012 the pair has reversed and started new
multi-month uptrend. And what was the state of market participants?
First look at COT net positions
of Commercials for Euro – couple of weeks before the actual reversal has
happened the commercial participants were all net long and at the levels not
seen in years.
Now we can look at COT net
positions for the Pound – as you can see it was in the decline for the long
time and at the moment of the reversal was floating around zero – i.e. the
market was neutral here.
Let’s now move to the Case 2 seen on the same chart. Around the March, 2013 the previous
trend reached its peak and reversed. So what’s happened with net positioning of
market participants? And here we can see the picture opposite to previous one:
all the Commercials are heavily net long on the British Pound, but COT report
for Euro shows that they are neutral on these currency futures.
here we can see the picture opposite to previous one: all the Commercials are
heavily net long on the British Pound, but COT report for Euro shows that they
are neutral on these currency futures
Let’s now move to Case 3 – the
reversal of multi-year trend which has happened in August, 2015. And once again
we see the same picture. The price has reversed and the uptrend has started.
But prior to this COT report for Euro shows that Commercials were heavily net
long, then the value of positions started to decrease. What about positions on
the Pound? It was floating around zero – the market was neutral here.
So what do these examples show
us? You can use the COT report to identify quite precisely that in the upcoming
weeks the trend will reverse – and based on this knowledge move on the other
side of the barricades. We have to check two triggers:
If you have a) maximum value of net positions
for Commercials for currency A reached and decline has started – the base
currency (in our case it’s (EUR); b) close to zero (or floating around) net
positions for currency B (in our case it’s GBP) – then the market is at the
turning point – from downtrend to uptrend.
If you have a) close to zero value of net
positions for Commercials for currency; b) multi-year maximum net positions for
currency B is reached and started to decrease – then the market is at the
turning point – from uptrend to downtrend.
One important thing to remember is that we are
talking here about big timeframe – it could take from couple of weeks to couple
of months for price to change it direction as the start of multi-year trends
usually represent the fundamental shifts in the economies and views of
participants. But if you’ll be patient you’ll be rewarded with the long-lasting
trend you can ride for months or maybe even years.
Hope you'l find it useful!