Preschool>= Lesson Status ?
Kindergarten>= Lesson Status ?
Elementary>= Lesson Status ?
Grade 1 Support and Resistance Levels
Grade 2 Japanese Candlesticks
Grade 3 Fibonacci
Grade 4 Moving Averages
Grade 5 Common Chart Indicators
Middle School>= Lesson Status ?
Grade 7 Important Chart Patterns
Grade 8 Pivot Points
Summer School>= Lesson Status ?
High School>= Lesson Status ?
Grade 9 Trading Divergences
Grade 10 Market Environment
Grade 11 Trading Breakouts and Fakeouts
Grade 12 Fundamental Analysis
Grade 13 Currency Crosses
- What is a Currency Cross Pair?
- Crosses Present More Trading Opportunities
- Cleaner Trends and Ranges
- Taking Advantage of Interest Rate Differential
- Obscure Crosses
- Planning Around News and Fundamentals
- Creating Synthetic Pairs
- Euro and Yen Crosses
- How to Use Crosses to Trade the Majors
- How Cross Currency Pairs Affect Dollar Pairs
- Summary: Currency Crosses
Grade 14 Multiple Time Frame Analysis
Undergraduate>= Lesson Status ?
- Why Keep a Trade Journal?
- Benefits of Keeping a Journal
- What Should You Record in Your Journal?
- Potential Trading Area
- Entry Trigger
- Position Sizing
- Trade Management Rules
- Trade Retrospective
- Trading Journal Statistics
- Reviewing Your Trading Journal
- Difficulties of Keeping a Trade Journal
- Summary: Keeping a Trade Journal
Graduation>= Lesson Status ?
- Which Trading Style is Best for You?
- Which Currencies Should You Trade?
- What is Your Level of Trading Experience?
- Should You Be a Discretionary, Mechanical, or Hybrid Trader?
- What Kind of Mechanical System Suits Your Personality?
- What is Your Attitude Towards Risk?
- What Kind of Stop Suits Your Trading Style?
Your Very Own COT Indicator
Having your very own COT indicator is like having your own pony.
Using the COT report can be quite useful as a tool in spotting potential reversals in the market.
There's one problem though, we cannot simply look at the absolute figures printed on the COT report and say, "Aha, it looks like the market has hit an extreme... I will short and buy myself 10,000,000 pairs of socks."
Determining extremes can be difficult because the net long and short positions are not all relevant. What may have been an extreme level five years ago may no longer be an extreme level this year. How do you deal with this problem?
What you want to do is create an index that will help you gauge whether the markets are at extreme levels. Below is a step-by-step process on how to create this index.
- Decide how long of a period we want to cover. The more values we input into the index, the less sentiment extreme signals we will receive, but the more reliable it will be. Having less input values will result in more signals, although it might lead to more false positives.
- Calculate the difference between the positions of large speculators and commercial traders for each week.
- Rank these results in ascending order, from most negative to most positive.
- Assign a value of 100 to the largest number and 0 to the smallest figure.
The formula for calculating this difference is:
Difference = Net position of Large Speculators - Net position of Commercials
Take note that if large speculators are extremely long, this would imply that commercial traders are extremely short. This would result in a positive figure.
On the other hand, if large speculators are extremely short, that would mean that commercial traders are extremely long and this would result in a negative figure.
And now we have a COT indicator! This is very similar to the RSI and stochastic indicators that we've discussed in earlier lessons.
Once we have assigned values to each of the calculated differences, we should be alerted whenever new data inputted into the index shows an extreme - 0 or 100. This would indicate that the difference between the positions of the two groups is largest, and that a reversal may be imminent.
Remember, we are interested in knowing whether the trend is going to continue or if it is going to end. If the COT report reveals that the markets are at extreme levels, it would help pinpoint those tops and bottoms that we all love so much.
We dug around the forums and found this little gold nugget for you. Apparently you can download the COT indicator if you're trading on an MT4 platform and you can find the link in our COT data to indicator forum thread!
While you are logged into your account,
you can save your progress in the School of Pipsology!
- What is Market Sentiment
- Commitment of Traders Report
- 3 Simple Steps to Access the COT Report
- Understanding the Three Groups
- The COT Trading Strategy
- Picking Tops and Bottoms
- Your Very Own COT Indicator
- Getting Down and Dirty with the Numbers
- Summary: Market Sentiment