Hello,
I know you use COT to confirm your directional bias but the new COT reports that were introduced in 2009 which shows leveraged short/longs has no statistical edge.
Where have you come up with this method as I don't think it works? Did you do your research? no institution or successful traders use it. Your winning trades has more to do with the other things you preach, not COT. I have to give you credit about your fundamental stuff as that is spot on and you can see how amazing it works with Matty's trades that is featured on the blog. Does he have a myfxbook or public track record? I'd be curious to see it.
I assure you the COT stuff is a waste of time.
thoughts? what is everyones opinion? I have yet found anyone who uses cot with any benefit
I think you should do research on sentiment analysis and adopt that instead where you see the positions retail traders have and you do the opposite if all your analysis lines up. This method alone has been proven to have a 70% success rate and thats without your additional filters and analysis.
80-95% of Retail Traders lose money over the long term trading Spot FX. Doesn't it make sense to be on the opposite side of retail trades.
Interesting question in this discussion: To summarize, " Why to use COT, why not Speculative Sentiment Index FXCM (SSI)? I will assume we are talking about Forex spot market here. Choice of words and trade logic suggests that @optuma.software is a strong supporter of contrarian trading. In fact your logic is valid, if 80% trader lose what so ever direction they are trading in, then why not go contrarian (and be with 20% winners)? It seems to me, logic is right but, when you implement contrarian strategy solely based on net buyer or seller on FX pair, it comes with following caveats:
(0) When I trade any asset class, the process involves:
Fundamental analysis: Macro, economy, rates ..
Technical: Trend, Levels(POC, price levels, Rel strength)& signal (entry/exit)
Sentimental : SSI, COT and Daily Option expiry
Others: seasonality, correlation, intermarket.. )
First 2 are essential, then I use sentiment tool to help me enhance my selection/rejection process for trade candidate( for forex pair). 'Other' are part of my fundamental but I don't use seasonality (yet). So, you are using only small part of available tools for analysis. Can't we use all analysis tools and find confluence?
(1) If the index is showing more buyer than sellers, TA can signal that the market is in an overbought condition, and that there may be pressure to sell, this coincide with contrarian trade. (opposite is true for oversold more seller than buyers)
(2) Professionals see speculative sentiment as "setting to measure disagreement between unsophisticated speculators and smart money". **see research below
(3) for betting against speculation sentiment, you need a sophisticated strategy (portfolio wide) *** see research
(4) This is more useful for swing traders, you don't use sentiment for intraday trading.
(5) I have seen expert traders (MT4 platform with own custom indicators) use SSI, ATR and order book data. Before pulling the trigger, they have conditions to be met: like EMAs, MACD and ATR readings..)
(6) @Marcus Raiyat From Marcus's comment above: possibly major chunk of traders could be HFT or traders with very bad setups. If I follow them (to go opposite) It is already a bad enough thought process.
(7) You can use this strategy when you are a brand new trader with no edge, education, strategy and experience. Trade very small and paper money to test the waters. But when you have enough experience, confidence and capital, expand your study, strategy and process. Add more tools..
(8) If, I have to trade contrarian then my process will be go to daily chart to find price action, trend, trendline, levels, possible trend reversals (polarity change). Then possible what I don't see in chart COT, Sentiments, macro..) Make my trade thesis, do I like this setup? if yes, pull the trigger.
When I was using SSI (sheep slaughter info) the rule of thumb was 'Buy when the sentiment is 80% sell and sell when its 80% buy. It did not give me an edge.
In my trading strategy I base my swing trades on the four analysis above on each trade each time. I am a small trader, have been trading FX for last 5 years. First year loss of ~$1500, next two years break even +/- $250. And last year onwards I am profitable.
References:
(1) Speculative Sentiment Index (SSI) | FXCM Australia
(2) ** Speculation Sentiment - Executive Summary by Shaun Davies :: SSRN
(3)*** SpeculationSentiment20.pdf (d30i16bbj53pdg.cloudfront.net)
(4) SSI Indicator (aka Market Sentiment) for MT4 | Page 4 | Forex Factory
What an interesting thought process. To start, every single trading position is subjective, and not objective, and therefore there is never one single right answer that covers all scenarios. All types of information and analysis are valuable, if applied in the right way, and form working parts of a wider framework - so focusing on one element (like COT data) and extrapolating success rates for trading decisions is an unfair and redundant study.
If only it was as easy as testing one variable, versus price data, and coming up with a winning strategy... every data scientist would be rich. But they're not.
A more suitable comparison would be to compare a complete strategy, with all variables that comprise the working components of the trading decisions, versus the success rate - and that is much harder to do when discretionary non-measurable inputs are utilised (virtually impossible).
This leaves you with only sense-making of summarised data, and one's own ability to interpret that information, as a benchmark of successful trading.
Don't believe me, go try and model George Soros' trading strategy - post your findings here. Something that may seem useless by itself, may be useful when used in conjunction with other factors... which is actually the case with lev fun open interest, and fundamental predispositions.
With regards to contrarian retail positions... the volume of all retail positions combined is negligible in comparison to total market volume, and therefore analysing their activity is also redundant.
Just because 70% lose, doesn't mean everyone who traded the opposite direction will win with a 70% hit rate.
The losing retail activity generally comes from over-leveraging, high-frequency positions, and terrible risk management - not from the direction of the trade.
Therefore in order to profit from retail traders losing activity, you'd need:
The entry and exit times of each position
Position sizes (gross exposure, utilised margin)
Commissions, and spreads
Length of holding period
Direction of trade
Without ALL of the above information, it's very unlikely a trader entering opposite would make money.
So, if retail positions have:
negligible volume
and losses are not solely due to directional bias in most cases
It's fair to conclude taking the opposite side of retail positions is inherently flawed. Not to mention, accessing reliable data, from every single retail brokerage of all their user's trades is also impossible.
On the flip-side, analysing the COT report, where reportable members, like the leverage funds, have enough purchasing power to influence exchange rates, is a much better study to conduct.
From our findings, the percentage of open interest, and changes in open interest of lev. fund positions is a strong tool for measuring supply and demand in the market - nothing more, nothing less.
We also concluded, that measuring lev funds net open interest positioning provides a substantial edge when used in confluence with a fundamental trade idea.
Would love to see your research and studies, post them below and I'll check them out.