CoT Report Trading Strategy Contents [hide]
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Commitments of Traders Report Buy and Sell with Dealers/Intermediary Traders o Features o How to Trade? o Examples Nuances Discussion
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Commitments of Traders Report Commitments of Traders report is released by CFTC every Friday and contains the data on long and short futures and options positions throughout US exchanges. Among other things it 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 believed that using the reported data on the number of "smart money" positions taken in a given pair, a Forex trader may skew winning chances in his favor. The report contains a rather big set of quantitative characteristics based on five classes of traders:
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Dealer / Intermediary - banks, brokers and dealers. Asset Manager / Institutional - hedge funds, ETFs, big investors. Leveraged Funds - private money managers. Other reportables - other traders, mostly non-investors who need to hedge risks. Nonreportables - everyone else.
If you want to follow some category of traders, it should definitely be either Dealers or Asset Managers as these two categories consist of the "smartest money" — the sell-side of the futures market. The most simple way would be to buy a currency pair whenever the number of Dealer long contracts rise and short contracts fall. Of course, there are numerous modifications possible based on adding some other categories into the formula or using additional market data for entries or exists.
The backtesting results of more than thirty strategies based on CoT reports have shown that most of such strategies (following Dealer trades) offer a positive edge in long-term perspective. The most consistent strategy is presented below.
Buy and Sell with Dealers/Intermediary Traders Surprisingly, the most straight-forward interpretation of the Commitments of Traders report yields a profitable output on all of checked major currency pairs except AUD/USD, albeit with quite significant drawdowns over the course of nearly 8 years.
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Statistically proven system. Only few minutes per week to dedicate. Limitless potential for strategy development based on CoT reports.
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Significant periods of drawdowns (especially following the global financial crisis of 2008). "Always in the market" mode of trades. Profitability levels are not that high. Commitment of Traders reports releases are sometimes delayed (see Nuances).
How to Trade? The rules of the this strategy are pretty simple:
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Buy when the number of Dealer long positions rises compared to the previous report and the number of short Dealer positions falls compared to the previous report. Sell when the number of Dealer long positions falls compared to the previous report and the number of short Dealer positions rises compared to the previous report. If both the number of the long positions and the number of the short positions rise or fall simultaneously, then no trading signal is generated. The current position remains open.
After the first entry is executed, the strategy remains in the market during all times.
The execution of this strategy is also uncomplicated. Every CoT report has a separate field for changes in positions compared to the previous report, so there is no need to calculate anything. All 7 major currency pairs can be quickly checked and the respective entries and exits executed.
There is no stop-loss, take-profit or any additional exit conditions. Previous position is closed when a new position in the opposite direction is entered. The size of the position does not increase when a new CoT report shows an entry signal in the same direction.
Examples Below is an example of five trades executed during the Summer of 2012 based on the strategy of following the positions of Dealers and Intermediary traders.
The first entry is a short signal generated on July 6, 2012. The following Commitments of Traders report shows the reason for entry. The data in the report are valid as of July 3, 2012. We are interested only in Dealer/Intermediary positions (the so called "smart money"). The currency we are looking at is Euro, meaning that the data is for EUR/USD currency pair. Changes in Dealer/Intermediary long and short positions are reported compared to the previous report (released a week ago).
The position is closed next Friday, July 13, 2012, when the report with data for July 10 is released. It shows a rise in long contracts and drop in short contracts, which is a signal for a buy trade (the first number is longs, the second is shorts, and the last one is spreading, which is not used in this strategy):
A CoT report released on July 20 shows that both the number of long and the number of short contracts increase compared to previous report. It means that the position remains open for one more week.
The long position lasts for two weeks as it is closed on July 27 using the data for July 24. A short position is opened in stead of the long one.
On August 3, when the report with July 31 data becomes available, it only confirms the short position:
The following Friday, August 10, both sides of the contracts rise for EUR/USD, which is not enough to warrant a termination of the current short position:
August 17 brings an end to this short trade as the Dealers' long positions grow while their short bets are dropping. A long position is opened immediately.
It survives for one week only as the next CoT report reverses the situation:
Nuances There are some important precautions to be aware of when trading CoT reports:
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Do not forget to swap short and long positions for inverted currency pairs (USD/CAD, USD/JPY, USD/CHF and USD/NZD). Even though the backtest of this strategy on AUD/USD has shown a negative result, it is best to consider the whole set of majors as one portfolio and not to exclude AUD/USD from it. Remember that the Commitments of Traders reports are released every Friday at 15:30 EST and contain data as of Tuesday of that week. Sometimes, report releases are postponed due to holidays or unexpected disruptions in the work of the CFTC website. It is trader's own duty to decide whether to use the data from such postponed reports for trading or to ignore them. The data for positions in USD/MXN, USD/BRL, USD/RUB and XAU/USD (gold) is present in the reports, but the backtesting results were very inaccurate for these instruments and they were omitted from this strategy. You could still try trading them at your own risk, which originates mainly in higher spreads.
Warning! Use this strategy at your own risk. EarnForex.com cannot be responsible for any losses associated with using any strategy presented on the site. It is not recommended to use this strategy on the real account without testing it on demo first.
Discussion: Do you have any suggestions or questions regarding this strategy? You can always discuss CoT Report Trading Strategy with the fellow Forex traders on the Trading Systems and Strategies forum.
The Opportunities of Trading the Forex Hedged Grid System ← Back to Forex Article List
I have seen the hedged grid system been used successfully (and highly unsuccessfully) over the last few years. Unfortunately the failures tend to discourage traders from taking advantage of this great system. I have found that the failures are mainly due to ignorance, impatience and greed (common reasons for trading failure).
In a nutshell the grid system uses the following methodology. You start by buying and selling a currency. When the price moves a predetermined distance (grid leg) you cash in the positive leg, leave the negative leg and buy and sell again. Sooner or later the system goes positive and you would then cash in when it is positive.
This is a brief summary of the content of our free hedged grid trading course available on expert-4x.com. Please refer to this course for more details of how money is made. The attraction is that the system is reasonably mechanical, can be programmed and does not take much supervision as exclusively entry orders are used.
Money is made when the price retraces 100%, 50%, 33% at various levels. This starts looking like a strategy that supports the Fibonacci concept. The grid system is also based on the nature of the market to trade sideways 80% of the time and to trend 20% of the time.
The dangers are that what if the price does not retrace and continues to trend. The Grid system can not make money in a trending market — full stop. One has to realize that. You therefore need Strategies to minimize damage during these periods:-
Firstly I have found that the biggest mistake made by traders is that they select a very small grid leg sizes e.g. 20 to 30 pips. This is a recipe for disaster. The trick is to use big leg sizes between 150 and 300 pips. What this does is that it sometimes turns a trending phase into movement in a sideways market. I would typically use 300 pips for the GBPJPY and 150 pips for the EURUSD for instance.
Secondly there is no rule that says that the legs have to be the same size. So I change my leg sizes in trending markets to be even bigger. If I started with 150 for the 1st leg I would go to 200 for the 2nd leg and 250 for the 3rd leg etc. This makes sure that I am carrying less loss making transactions in a trend.
Thirdly — sometimes it is wise to increase the number of lots with the trend compared to the numbers against the trend in a good trend. However be aware of having the same number of sell and buy transactions. All you will have done was lock in your current status in a 100% hedge.
Fourthly — This is the biggest change and most important one that I personally have made in my grid trading strategy. Always cash in all your transactions when your system is positive and when the price reaches the end of one of your grid legs. By cashing in you are reducing the risk of carrying negative lots in a trending market. This also gives you an opportunity to re-assess the market conditions.
Fifthly:- Cash in a start again is always an option. One of my strategies is to cash in all my open positions when the 3rd leg of my grid is reached and start again. Experience has taught me that this is a short term pain that goes away very quickly and is soon forgotten.
People that have traded the grid system will immediately see how the above approaches will reduce the risks of exponential losses building up in a strongly trending market. Please feel free to contact Mary McArthur at
[email protected] for clarification on any items discussed above. She has numerous examples of successful applications of grid trading
This article is part of a series and many more will follow on Grid trading, money management and Forex Trading Strategies.
by Mary McArthur
Mary McArthur (
[email protected]) is an Expert4x trader. As an expert, she authored a free hedged grid trading course onwww.expert4x.com.
