It’s been some time since I shared my concepts on market evaluation with you. I see that reader curiosity within the subject will increase. Particularly for individuals who try to grasp the true causes behind the worth actions in a specific market.
So right now, I need to transfer from idea to observe and based mostly on knowledge obtained within the COT report on 18th November 2016 to make an in depth evaluation of one of many markets. My aim is to indicate you ways I do it, so that you’d be capable of use this knowledge in your buying and selling.
Let`s start! Right now we`ll take a look at the futures market Swiss franc. Beneath you possibly can see the COT report for this instrument of November 15, which we obtained on Nov 18. Only a fast reminder: CFTC publishes this report each Friday, the place the information originates from final Tuesday, i.e. we receive this knowledge with a three-day delay.
It is a crucial issue to be thought of, however we should always not doubt that it’s nonetheless related. I`ll present it right now.
Analyzing the COT report
On this report, I`m primarily concerned about modifications of two columns marked inexperienced. The primary one is the whole variety of open positions (Open Curiosity). The second exhibits us the modifications within the construction of economic contributors’ (Business) open positions.
Right here we will see that throughout the reporting week of November eighth – 15th, the whole variety of open positions modified insignificantly. The quantity elevated simply to 901 contract. As well as, throughout this era the operators have elevated their lengthy positions (1882 contract), minimize their shorts (-1736 contract) and had a web lengthy place of 36521 contract (39568 – 3047 = 36521). It’s also value noting, that the share of economic contributors’ lengthy positions to the whole quantity of open positions is 72.6% (39568 / 54533 * 100 = 72.6). Now, let`s open the chart and see, how the worth modified throughout this era.
What can we see on the chart?
Right here I’ve outlined 5 buying and selling periods of the reporting week and famous the day, when this knowledge was printed (after we obtained these knowledge at our disposal).
The worth was falling throughout the 5 days and eventually on November 15, has up to date the lows of June 2016. For the subsequent three days after that, whereas the report has not been printed but, the worth continued its decline. Important modifications throughout this three-day interval has not occurred, besides that the worth has not dropped even decrease. On this foundation, I conclude that the information offered within the report stays legitimate.
What relative indicators I exploit
It`s time to check the information obtained within the report with historic values to evaluate the power of their affect in the marketplace. I`m utilizing Timing Charts for it. Right here now we have the chance to check not solely absolute values offered within the COT report, however the relative values as nicely. I’m personally satisfied, that it’s a lot simpler to work with relative figures than with absolute.
The primary relative measure I exploit is the COT Index. You possibly can see this indicator on the backside of the picture, just under the modifications of web open positions of operators. Even if visually the 2 curves are equivalent, in commerce when it’s worthwhile to decide the reference ranges, it’s simpler to function with relative values, as a result of these values will all the time be in the identical vary. This index compares a present web open place with the excessive and low for the final 26 weeks (six months). You possibly can change the variety of weeks concerned within the index calculation at your discretion, however I exploit 26 weeks.
C.O.T. Index = (Present Internet Place – Minimal Internet Place [Weeks]) / (Most Internet Place [Weeks] – Minimal Internet Place [Weeks])
Let`s think about that this indicator exhibits 100%. This is able to imply that presently now we have the utmost web lengthy place of operators for the final 26 weeks. In any other case, if this index will present zero%, this can inform us that operators now have the utmost web shorts over the identical interval.
Open Curiosity P.c
One other relative indicator that I exploit yow will discover within the report (Picture 1). That is the proportion of economic contributors’ open lengthy or quick positions within the complete open curiosity. If the COT index is above 80%, as in our instance, I exploit the next formulation:
Open Curiosity P.c = Business Lengthy / Open Curiosity
If the COT index is under 20%:
Open Curiosity P.c = Business Quick / Open Curiosity
In our case, the COT index is 93.88%. On the chart under, along with absolutely the worth of Open Curiosity modifications I mirrored modifications in lengthy place of operators concerning the identical worth (Comm Lengthy / Open Curiosity).
We`ve acquired a coefficient of zero.73 after rounding or 73 p.c. Because of this within the complete open lengthy positions 54533 contract, 73 % or 39568 contracts represent a protracted place of operators and solely the remaining 27 % distributed amongst different teams. On the similar time, if we take a look at the whole quantity of quick positions the identical 54533 of the contract, the operators preserve solely 3047 contracts or 5.6 % of the whole.
Presently, the operators maintain virtually the utmost web lengthy place of 93.88% during the last 26 weeks. As well as, the share of operators’ lengthy positions to the whole quantity of open curiosity is 73% and continues to develop. Rising this share, it will increase the likelihood the worth will reverse.
If we take a look at the modifications historical past of this indicator, we will see that the worth modified its course when the worth was smaller.
For this market, I imagine the circumstances can be met if the COT Index is above 80% or under 20%, whereas Open Curiosity P.c is larger than 60% or 50%, respectively. For different markets, usually, the management values of the primary indicator stay the identical 80% and 20%, whereas the second might differ from market to market. It’s simple to establish them, simply by wanting on the historical past and figuring out for which Open Curiosity P.c values there was a pattern change.
This doesn’t imply that after the worth reaches these targets, I’ll instantly open a commerce. As I stated earlier than, the circumstances talked about above are solely one among three factors to be checked when opening a commerce. Subsequently, solely after assembly these standards I`m beginning to use the technical evaluation instruments solely with a purpose to enter the market.