How I'm using COT reports to identify big trend reversals

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Ievgen Ryzhov
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Ievgen Ryzhov  

Hi folks!

 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.

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

 

 

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:

I)                 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.

II)               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! 

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