Long-term strategy based on COT reports

0 893

Here is a strategy that uses a new indicator based on COT reports, as well as an example of a currency pair analysis, which will help the trader in using the indicator and making trading decisions.

Background

Some time ago, when analyzing currency pairs, I felt the lack of tools in my arsenal. I needed something that would help me in making trading decisions. That's why I decided to create a new indicator and now I present it to the general public. The work took a lot of time. In addition, not all of the ideas I had in mind have been implemented yet. For these and some other reasons the source code of the indicator is not available.

What are COT reports

COT (Commitments of Traders) reports are reports issued by Commodity Futures Trading CommissionThe US futures markets are based mainly in Chicago and New York, where the capital investments of futures market participants are listed, where grain, cotton, financial instruments, metals, energy, etc. are traded. (In the U.S., these markets are mainly based in Chicago and New York).

The CFTC releases COT reports every Friday at 3:30 Eastern European Time that reflect the commitments of traders announced on the preceding Tuesday.

Possible tools for analysis

The indicator can be "pinned" to 7 currency pairs, silver and gold (and also to the SP500 index, but we will not consider it). A complete list of possible instruments for analysis:

USDCAD
USDCHF
GBPUSD
USDJPY
EURUSD
AUDUSD
NZDUSD
Gold
Silver

Working timeframe

The weekly chart is used for the analysis (timeframe W1). The indicator will be useless for scalpers, daytraders and everyone else who wants to make a quick buck.

Setting the indicator

Unpack the archive.
Copy the file COTindi by Sym.ex4 to the folder MQL4 -> indicators.
Copy the file COT_report into the folder MQL4 -> files.
Copy the template to the templates folder.
Restart the terminal.
Open the chart of the desired currency pair (any of the tools listed above).
Let's switch to the W1 timeframe.
Set the template with the name COT.

The schedule should look like this:

If your indicator does not appear as shown in the figure above, try the following:

Press the key combination CTRL + I.
Click on the indicator name.
Click the "Properties" button.
In the window that appears, click the OK button.
Click the "Close" button.

Now the indicator should look like the one shown in the figure above.

How to use the indicator

The indicator window is divided into two parts (see picture above). The top window is the COT reports issued by the Chicago Mercantile Exchange (CME). To scroll through the COT reports, use the two green "buttons" at the top left of the screen: [Prv page] and [Next page]. To scroll one way or the other through the report, double-click one of the buttons and move it anywhere on the screen. When a new tick appears, a new page will appear (when ticks are not received, for example on weekends, you need to refresh the screen from the context menu after dragging the button). The number of displayed records can vary from 15 to 60 per page (the value is set in the ShowRecords parameter in the indicator properties).

At the bottom of the screen is a graphical display of data for each category (Dealer, Asset manager, Lev Fund, Other RPT, TOT Other RPT and Non RPT), from 2006 to the present. The display of the necessary category is controlled by the ShowData parameter in the indicator properties (can take values from 1 to 7; details below).

The green line of the indicator shows the total amount of long positions (long futures contracts) for the selected category on the Chicago Mercantile Exchange. The line displays numbers greater than 0 and is drawn above the zero level.

The red line of the indicator shows the total amount of short positions (short futures contracts) for the selected category on the Chicago Mercantile Exchange. The line displays numbers greater than 0 and is drawn above the zero level.

The gray dotted line of the indicator reflects the difference between long and short positions. The number can be both above and below zero and, accordingly, fluctuates near the zero level. In some cases, it reflects the sentiment of market participants.

The bold black line is drawn at the weekly closing price of the selected currency pair (in the example - EURUSD).

Categories of displayed data

The indicator can display 7 different categories of information (controlled by the ShowData parameter).

Category #1 (ShowData = 1) - section DEALER. Information is shown on the open long and short contracts of large companies trading "futures" to protect their commodities from large fluctuations in the foreign exchange market. As a rule, these participants are on the wrong side of the market.

The section is marked in red, which means that graphical information is displayed based on the data from this section.

Max / Min long EUR - maximum / minimum long position on the euro, from 2006 to the present day (value can only be positive).
Max / Min short EUR - maximum / minimum short position on the euro, from 2006 to the present day (value can only be positive).
Max / Min net EUR position - maximum / minimum difference between the short and long position on the euro, from 2006 to the present day (the value can be both positive and negative).
Max / Min EURUSD - the maximum / minimum closing price of the euro, from 2006 to the present day.

Categories №2,3 (ShowData = 2,3) - sections ASSET MANAGER and LEV FUND. It shows information on open long and short contracts of market makers who move prices. It is necessary to pay special attention to where these players are (at what price levels they buy and sell). We cannot predict what market makers will do next week, but if we understand that market makers have been holding buy contracts for a long time, it is probably time to sell. Conversely, if market makers are holding sell contracts for a long time, we should look for buying opportunities.

All other displayed information (Max / Min long EUR, Max / Min short EUR, etc.) means the same as for the DEALER section (see above).

Categories #4,5 (ShowData = 4,5) - sections OTHER RPT and TOT OTHER RPT. Not particularly useful information, which, however, is reflected in the COT report.

Category #6 (ShowData = 6) - section NON RPT. Shows information on open long and short contracts of small market participants, most of which tend to be on the wrong side of the market.

Category #7 (ShowData = 7). The last, but not the least important category. Reflects information on the difference between long and short contracts in the three most important categories described earlier: DEALER (green dotted line; these participants are on the wrong side of the market), ASSET MANAGER + LEV FUND (red dotted line; big players, banks/funds, central banks; usually on the right side of the market; it is necessary to move with them and try to understand their logic), NON RPT (gray dotted line; small players, usually starting to move after market makers at the very last moment). The black line is the weekly closing price of the currency pair.

As stated earlier, our job is to try to recognize the current actions of market makers, or better yet (but harder) to try to anticipate their plans. If you look at the following currency pairs:

GBPUSD
EURUSD
AUDUSD
NZDUSD

you will see that they move (to a greater or lesser extent) behind the red line (see the figure above for the euro example).

And currency pairs:

USDCAD
USDCHF
USDJPY

move (to one degree or another) move against the red line.

Example of the analysis of the current situation on EURUSD

For the analysis we will use the summary information on the difference between long and short positions (parameter ShowData = 7).

Since March 2014, the price has fallen from 1.3912 to 1.2783 (weekly closing prices), that is a drop of 1200 pips in 7 months. The price could go further to test 1.2159 (2012 low) or go even lower to test 1.1966 (2010 low), which is another 800 pips.

Is that possible? Yes, it is possible. However, the likelihood of such a development is not very high. Why? Because the market makers and the big players have been holding short positions for the last several months and sooner or later they will start to close the sell orders and open the buy ones. It may happen next week or next month or even later, but sooner or later it will happen.

The most reasonable solution is to start buying small lots every 50-100 pips (but keep in mind that the account size must be such that drawdown 800 points has passed without particularly serious consequences). The goal is to take 800-1000 points within the next few months.

Additional parameters of the indicator

The ShowOpenInterest parameter shows open interest (in the form of bars).

The SP500Index parameter allows to display the SP500 index chart instead of a currency pair. To do this it is necessary to perform the following actions:

Open the _SP500 symbol chart:

Switch to the W1 time frame

Attach the COT template to the graphic

In the SP500Index parameter, write the value of the SP500 index symbol; in the ShowData parameter, write the value 7: