Letters To S&C by Technical Analysis, Inc.
COMMITMENTS OF TRADERS
Further to Giorgos Siligardos’ November 2014 article on when the “smart money” fails, I would argue that fail or not, the Commitments Of Traders (COT) report is “much ado about nothing.” After reading Larry Williams’ Secrets Of The COT Report last year, I did hundreds of hours of backtesting, studying, and simulated trading and I come away with a big thumbs down on using COT data.
As some of you know, the so-called smart money (that is, commercial speculators) generally buy when markets sell, and vice versa. In effect, they’re not really trading but hedging. (Technically, this reminds me of inversely related markets like the US dollar and gold, or the Dow Jones Industrial Average (DJIA) and the volatility index (VIX) — neither of which provide a truly predictive view into the others’ future activity). In any case, the only hope of making money using the COT report might be to enter an opposite position to the commercials. For example, when a selling campaign is ending, one might consider buying, and so on. In fact, this is the only way you can trade using COT data unless you, too, are hedging and have the enormous financial clout to short long markets, and be long short markets. But even so, the COT report doesn’t provide an effective early warning system as to when large interests are going to move. So I ask: For the average speculator, what’s the intrinsic value in following it?