A quick guide to: COT Indicator

What is the COT Report? What does this indicator do? When should you use it? All of your questions answered about our COT Indicator…

What does it do?
The Littlefish FX COT Indicator displays a really neat visual aid on your NinjaTrader7 platform.

What’s the best thing about it?
The beauty of this indicator is that it automatically downloads and displays a clear and easy to follow historical measure of the COT positioning on your charts for you. Instead of having to go and look at the CFTC report yourself (which can be a little bit daunting), the indicator maps the direction of the COT participants’ positioning so you can track it alongside your price charts.

Ok. So why is the COT report and data so important?
Without getting into too much detail here, the COT report essentially details the market positioning of the the three categories of market participants:

  • Commercials (Dealer Intermediary) – these are big corporations and multinational companies like Coke, Nike, etc.
  • Non-Commercials (Asset Manager/Institutional) – these are your banks and financial institutions.
  • Speculators (Leveraged Funds & Other Reportable) – these are funds and traders.

Why is the COT report so useful?
Tracking the COT report gives traders the chance to gain an insight into how Banks and financial institutions are positioned in the markets, and with these guys generally tending to be correct about a currency’s direction, there is a fantastic opportunity to shadow their moves and trade in line with the big fish.

Sounds great. So what does the indicator looks like?
IMPORTANT! Although there are three categories of COT participants, and the indicator allows you to display all three of these (Commercials in blue, Non Commercials in green & Speculators in red) the charts below only display the green and blue lines as these are the most important!

$GBPUSD (Daily) 21_04_2014 - 28_10_2014

The various windows at the bottom of the chart are what comprise the COT Indicator. The green lines indicate the Non-Commercials (the guys we want to follow!) and the blue lines indicate the Commercials ( guys we want to go in the opposite direction to)

There are quite a different data panels there, each measure the COT data report based around a different metric. So let’s go through what each of these are:

1 – INDEX
Index is a normal stochastic on the Net Position. It takes the highs and lows of the past X number of days and presents them as a value. This gives you a normalised view of what could be considered high or low in terms of net positioning.

2 – STRENGTH
Strength is simply the net long position over the total net position. This can give you an indication of long positions as a percentage, which in turn indicates the strength of the movement in the overall positions.

3 – MOMENTUM
Stefan Brice proposed the Momentum indicator in his book ‘The Commitment of Traders Bible’. Again, the idea is simple. Momentum represents the difference between the current COT Index, and the same Index 6 periods ago. If the Non-Commercial Momentum Index rises above 40%, the current downward movement is coming to a finish, and you can expect a rise in prices. Essentially, like many momentum indicators, this one is designed to show when trends or current movements are ending, rather than to provide entry points, but actually it works on entries as well.

4 – NET POSITION
Net Position is made up of the same three components highlighted in the COT report: Commercial, Non-Commercial and Speculators. It gives you an insight into how these three types of market operator are positioned in the FX market.

5 – WILLCO
WILLCO is a variation of the Index strategy, and is short for the Williams Commercial Index. It was first used by Larry Williams, a relatively well-known trader. He wasn’t satisfied with the simple Index, so he devised a slightly amended version, showing Net Operators and Open Interest as a Stochastic indicator.WILLCO gives a slightly different view to the standard Index.You can use it in exactly the same way as the normal Index Indicator, but it should provide a marginally better smoothing process.

6 – OPEN INTEREST
Open Interest is a basic but interesting feature of the COT report. It shows the open positions in the market. Open Interest is a volume indicator, so its primary use is as a supporting tool. Volume indicators are very useful for discovering trends and turning points: high volume, especially at key levels, can indicate the beginning of a turning point, while increasing volumes suggest the progression of a trend. Remember that high and increasing volumes aren’t always the same thing.

So, that was quite a bit to run through but essentially, the bottom line is that in each instance you want to be following the direction of the green line ( the Non-Commercials!)

How Do We Use It?
There are numerous strategies we can use based around the COT Indicator and we go into these in great detail within our Forex Trading Course, but we will of course highlight a few basic strategies here for you.

COT Indicator & Pin Bars

$GBPUSD (Daily) 29_05_2013 - 27_12_2013

The image above shows the Non-Commercial green line having crossed to the upside on the Index, momentum & WILLCO indicators signalling that price is going to be moving higher and so we look for a slight pullback and then bullish pin bar to enter long – highlighted in the circle on the chart.

LFCOT Indicator & Support/Resistance

$GBPUSD (Daily) 28_12_2012 - 03_03_2014

In the above image we can see the Non-Commercial green line crossing to the upside across the various indicators signalling that price will continue to move upward, but as added confirmation of the bullish move we can wait for the break out higher from the local resistance level to enter.

LFCOT & Trend Line Breaks

$GBPUSD (Daily) 18_09_2009 - 19_11_2010

In the above image we can see price moving in a steady downtrend with the Non-Comercial green lines all to the downside. However as price bottom out at lows, the green lines begin to cross to the upside , suggesting a bullsih reversal is on the cards, and shortly after we see the bearish trend line broken as price takes off higher.

Are there any more features to the COT Indicator?
Sure. Let’s list them below…

  • To be used with NinjaTrader platform
  • Downloads all historical data directly from CFTC
  • Automatically links to NinjaTrader Instruments
  • Additional ability to choose specific links
  • Can be utilised within Automated Trading Strategies based on release date of data (typically Friday) and the reported date (Tuesday)

Got any video guides on the COT Indicator?
We sure have, watch the video below…

— The COT Indicator is available free with our new Forex Trading Course. To find out more or purchase the course, click here — Use the discount code “LFXCourseCJ” to get £50 off!