Trading Strategies: COT Strategy Report
COT Trading Strategies – The Commodity Futures Trading Commission, or CFTC publishes the report of Commitments of Traders (COT) every Friday. The COT measures the net long and short positions taken by speculators and traders traders. It also includes data on the following currency pairs: USD / CAD, USD / CHF, GBP / USD, USD / JPY, EUR / USD, AUD / USD, RUB / USD, MXN / USD, BRL / USD and NZD / USD . It is considered that the use of the data reported on the number of positions of “smart money” taken in a given pair, the operator can skew currency chances of winning in your favor.
The report contains a large set of features based on five classes of operators:
- Distributors / Intermediaries (Dealer / Intermediary) – banks, brokers and distributors.
- Asset Manager / Institutional (Asset managers / Institutional) – hedge funds, ETF, large investors.
- Leveraged Funds, ie leveraged funds – private equity managers.
- Other Reportable (Reportable Other) – other operators, especially investors who need not cover risks.
- Nonreportable (Nonreportables) – everyone else.
If you want to follow some category of operators, you should definitely choose Distributors or Asset Managers as these two categories include the “smart money”, the seller of the futures market. The easiest way is to buy a currency pair when the number of long-term contracts Distributor rises and the number of short-term falls. Of course, there are many possible modifications based on the addition of some other categories in the formula or the use of additional market data for inputs or outputs.
The results of backtesting more than thirty strategies based on the CoT reports have shown that most of these strategies provide a positive edge in the long-term perspective. the most consistent strategy is presented below.
Buy and Sell with Distributors / Operators Intermediaries : CoT Trading Strategies
Surprisingly, but the most straightforward interpretation of the COT report yields a profitable exit in all major currency pairs except the AUD / USD, although with significant over almost 8 years drawdowns.
Characteristics: CoT Trading Strategies
- It is a statistically proven system.
- It only takes a few minutes a week.
- unlimited potential to develop the CoT reports based strategy.
- significant periods of decline (especially after the global financial crisis of 2008).
- Operating mode “always in the market”.
- Profitability levels are not as high.
How to Trade?
The rules are fairly simple:
- Buy when the number of long positions Distributor rises compared to the previous report and the number of short positions fall compared to the previous report.
- Sell when the number of long positions Distributor falls compared to the previous report and the number of short positions is elevated compared to the previous report.
- If both the number of long positions and the number of short increases or decreases simultaneously trading signal is not generated. The current position is kept open.
After running the first inning, the strategy remains in the market all the time.
It is easy to execute this strategy. Each COT report has a separate field for changes in positions compared to the previous report, so there is no need to calculate anything. You can quickly check all 7 major currency pairs and execute the respective inputs and outputs.
No stop-loss, take-profit or any additional output condition. The above position is closed when a new position is introduced in the opposite direction. The position size does not increase when a new CoT report shows an input signal in the same direction.
Examples of CoT Trading Strategies
Following the example of five operations carried out during the summer of 2012 based on the strategy to follow Distributors and Operators positions shown intermediaries.
The first entry is a short signal generated on July 6, 2012. The following COT report shows the reason for the entry. The report data are valid from July 3, 2012. We are interested only in the positions of Distributor / Intermediary (ie “smart money”). The currency we are looking at is Euro, which means that the data are for the EUR / USD. Changes in long and short positions Distributor / Intermediary reported compared to the previous report (published last week).
The position closes on Friday, July 13, 2012, when the report with data for July 10 is published. He shows the increase in long contracts and falling short, which is a signal to buy (the first positions are long , the latter are short , and the latter are spreading , but are not used in this strategy).
The CoT report published on July 20 shows that the number of long contracts and the number of short increase compared to the previous report. This means that the position is held open for one more week.
The long position lasts two weeks as closes on July 27 with data for July 24th . The short position is opened instead of long.
On August 3, when the report on the July 31 data is available, only the short position is confirmed:
Friday, August 10 , both sides of the contracts rise for EUR / USD, which is not sufficient to justify the termination of the current short position:
On August 17 ends this short trade as the long positions Distributors grow while their short bets are falling. The long position is opened immediately.
Survive for a week, the next CoT report reverses the situation:
There are some important precautions to consider to operate with the CoT reports:
- Do not forget to change the long and short positions for pairs of inverted currency (USD / CAD, USD / JPY, USD / CHF and USD / NZD).
- Although the backtest of this strategy in the AUD / USD has shown a negative result, we must take into account all major as a portfolio and not exclude the AUD / USD from it.
- Remember, TOCs reports collect data on the positions of traders every Tuesday of every week, and the public on Friday at 15:30 ET.
- Sometimes, reports were postponed due to holidays or unexpected interruptions in the work of the CFTC website. The operator decides whether to use the report data to operate postponed or will ignore them.
- The reports contain data corresponding to positions in USD / MXN, USD / BRL, USD / RUB and XAU / USD (Gold), but backtest results were very inaccurate for these instruments and were omitted from this strategy. You could try to trade with them at your own risk, which mainly originates from higher spreads.