The COT Indicator indicates the market positioning of major financial institutions as highlighted by the weekly COT report, and the Order Flow Trader maps the flow and volume in the market – offering the opportunity to trade in line with these institutions rather than against them.
When combined, these indicators become a powerful tool for trading on the right side of the market.
Let’s take a look.
In this Daily chart of USDCAD above, we can see that the Order Flow Trader gives a good amount of signals over the period. Within this mix there would be some breakeven trades, a few small losses, a few small wins and some very big wins.
However once we apply the COT Indicator in tandem, we can begin to really filter the trading signals given and look for only the signals with the highest probability. Remember the key thing to using the COT Indicator is to trade in line with the green line, which shows the Non-Commercial (Banks & Institutions) positioning in the markets.
Essentially, what we are looking to do is establish confluent signals in these two indicators to give a powerful dual signal that we can use to trade.
So the first trade highlighted on the left side of the chart, we can see COT turns negative as the green line crosses down through the blue, showing that Non-Commercials are positioned for further downside. Shortly after, Order Flow Trader gives a sell signal which we take in line with the COT signal. This trade eventually ends up over 300 pips in profit.
You will note that had you taken any of the counter signals (buy signals) from the point of the COT indicator turning negative, you would have had a hard time. This shows just how powerful the dual signal is in aligning you with the flow of the market.
Again, the second trade highlighted shows another powerful dual signal. COT turns positive (green line crosses up through blue) and simultaneously we get a buy signal on Order Flow Trader which we use to get long. This trade goes on to accrue over 1,000 pips in profit.
You can see here quite clearly just how powerful these indicators are when combined.
Using COT as a filter really maximises the signals generated by Order Flow Trader to give clear, high-probability trading signals.
We have only looked very briefly at the combined use of these indicators. And don’t forget, our Forex Trading Course contains full and detailed trading strategies and plans involving both indicators.