The Commitments of Traders Bible

Regardless of your trading methods, and no matter what markets you’re involved in, there is a Commitments of Traders (COT) report that you should be reviewing every week. Nobody understands this better than Stephen Briese, an industry-leading expert on COT data. And now, with The Commitments of Traders Bible, Briese reveals how to use the predictive power of COT data—and accurately interpret it—in order to analyze market movements and achieve investment success.

List of Illustrations xiii

List of Tables xix

Preface xxi

Acknowledgments xxv

Part I COT Theory

Chapter 1 The COT—Assorted History 3

The Grain Futures Administration 3

The Commodity Exchange Authority 4

The Commodity Futures Trading Commission 5

The Modern COT Data 6

COT Options and Futures Combined Report 8

COT-Supplemental Commodity Index Trader Report 9

A Fable 11

Chapter 2 COT Reports—Counting 1, 2, 3 . . . 15

The Long Form 17

The Short Form 23

COT-Supplemental Commodity Index Report 24

Chapter 3 Player Introductions 27

Sizing Them Up 27

The Reporting System 31

Commercial Hedgers 31

Large Speculators 33

Commodity Index Traders 34

Small Traders 36

Chapter 4 Fading Small Speculators and Other Half-Baked Schemes 39

TIP: Always Follow Commercials 39

TIP: Net Long Is Bullish; Net Short Bearish 40

TIP: Always Fade the Small Speculator 43

TIP: It Is Only Logical to Compare Hedging to the Seasonal Average 43

TIP: The COT Is Old News by the Time It Is Released 45

Chapter 5 Net Positions 47

Open Interest 47

Constructing Net Positions Charts 47

Large Speculator Patterns 51

Commercial Patterns 56

Small Trader Patterns 59

Commodity Index Traders 60

Chapter 6 The COT Index 63

COT Index Calculation (Commercials) 63

Alternative Look-Back Periods 66

The COT Index as the Great Normalizer 67

Interpreting the COT Index 69

Heal Thyself 72

Chapter 7 COT Movement Index 75

Commercial Movement Index 75

40 Point COT Surge Rules (Commercials) 76

Combining the Indexes 77

Fund Movement Index 79

Chapter 8 View from the Gallery 83

Keynes’s Theory of Normal Backwardation 84

Can Speculators Forecast Prices? 85

Returns to Speculators and the Theory of Normal Backwardation 86

Returns to Individual Traders of Futures: Aggregate Results 87

Luck Versus Forecast Ability: Determinants of Trader Performance in Futures Markets 87

The Returns and Forecasting Ability of Large Traders in the Frozen Pork Bellies Futures Market 88

Hedging Pressure Effects in Futures Markets 88

Hedging Demand and Foreign Exchange Risk Premia 89

Investor Sentiment and Return Predictability in Agricultural Futures Markets 89

The Behavior and Performance of Major Types of Futures Traders 90

Exchange Rate Changes and Net Positions of Speculators in the Futures Market 93

The Profitability of Speculators in Currency Futures Markets 94

Summary 95

Chapter 9 View from the Pits 97

The Study Data 98

The Trading Rules 98

Trading Rules Test Results 100

Trading System Considerations 100

Chapter 10 Chart Pattern Validation 105

A Brief Charting Primer 105

Bottom Formations 106

Top Formations 108

Continuation Patterns 111

Chapter 11 Getting Technical 115

COT-Stochastics 115

COT MACD-Histogram 117

COT-RSI 120

Standard Deviation (Bollinger) Bands 121

Conclusions 122

Part II COT in Practice

Chapter 12 Crossing Currencies 127

Commercials 129

U.S. Dollar Index 129

Currency Correlation Tables 132

Currency Futures Historical COT Charts 133

Chapter 13 Taking Stock 145

The COT Beats the Averages 146

Stock Index Correlation Tables 148

Stock Index Futures Historical COT Charts 148

Chapter 14 Test of Metal 155

Marking Time in Gold 155

The Gold/Silver Ratio 157

The Copper Caper 157

Commercials 158

Metal Correlation Tables 161

Metal Futures Historical COT Charts 161

Chapter 15 Oil’s Slick 165

To an Uninterrupted Gasoline Supply 165

Commercial Hedgers 168

Petroleum Correlation Tables 168

Petroleum Futures Historical COT Charts 169

Chapter 16 Interest in Rates 175

What Drives Rates? 175

Commercial Hedgers 176

Treasury Futures Correlation Tables 176

Treasury Futures Historical COT Charts 176

Chapter 17 Bean Counting 183

The One That Got Away 183

Commercial Hedgers 185

Soy and Grain Correlation Tables 189

Soy and Grain Historical COT Charts 189

Chapter 18 Moonlighting 195

It Might Be Corny, But. . . 195

Small Can Be Beautiful 196

Commercial Hedgers 196

Livestock Correlation Tables 197

Livestock Historical COT Charts 201

Chapter 19 Cedeless Oranges 205

Continuous Commodity Index 206

Food and Fiber Correlation Tables 208

Food and Fiber Historical COT Charts 208

Chapter 20 Now You CIT, Now You Don’t 217

The COT-Supplemental Report 217

Historical COT-Supplemental Charts 218

Epilogue 233

Appendix A: Alternative Net Position Formulas 237

Appendix B: Dodging the Pitfalls in COT Data 243

References 251

Glossary 257

About the Author 269

Index 271

"…best book I have read on the COT reports...will give you a better understanding of how the commodity markets work..." (About.com: Commodities)

Stephen Briese is the leading expert on analyzing the Commitments of Traders data published by the Commodity Futures Trading Commission. Briese has published a newsletter, Bullish Review, since 1988 and has written articles for several industry publications and spoken at a variety of industry trading and technical analysis conferences.

The Commodity Futures Trading Commission's weekly Commitments of Traders (COT) report has established the U.S. futures market as one of the most transparent exchanges in the world—and created a level playing field for commodity and futures traders of all sizes in the process. But the information found within the COT report extends well beyond the confines of the commodity pits and can be profitably applied to virtually any market sector, from equities and treasuries to forex, gold stocks, and exchange-traded funds.

Nobody understands this better than author Stephen Briese, an industry-leading expert on COT data. And now, with The Commitments of Traders Bible, he shares the insights and experiences of his successful career to help put the COT report in perspective. Written in a straightforward and accessible style, this detailed guide skillfully examines the predictive power of COT data and reveals how you can accurately interpret it in order to analyze market movements and make the most informed investment decisions possible.

Divided into two comprehensive parts, this reliable resource:

• Takes you through a brief history of the COT report and explains how it has evolved over time
• Illustrates how the dozens of numbers published on specific markets expose the positions of the biggest and smartest market insiders
• Describes how to properly view the COT Index and use it to avoid the traps that most observers fall into
• Offers technicians and chartists various ways to incorporate COT analysis into their existing programs
• Discusses individual idiosyncrasies and patterns that appear in certain markets—from oil to interest rates
• Lists hundreds of securities from all over the world whose prices are highly correlated with commodities contained in the COT report

Regardless of your trading methods, and no matter what markets you're involved in, there is a COT report that you should be reviewing every week. With The Commitments of Traders Bible as your guide, you'll gain an invaluable edge over uninformed market participants as you learn how to use legal "insider" information to enhance your everyday investment endeavors.

Praise for The Commitments of Traders Bible

"This book provides an important understanding of how the crowd operates in the markets. Steve Briese has given us a complete explanation of the metrics that are required to actually use contrary opinion methods."
—Woody Dorsey, President, Market Semiotics, and author of Behavioral Trading

"Steve Briese is the master of the COT and here gives us the benefit of many years of experience in using the Commitments of Traders reports in his trading. Steve guides us, with wit and humor, through how the COT is calculated, why it is valuable, and, more importantly—how to use it to uncover an edge in your trading and investing. You will profit from this book."
—Charlie Wright, Chairman, Fall River Capital, LLC

"I have followed Steve Briese's analysis for two decades in trading the commodities markets. His methods and conclusions from COT data are fact based and often properly contrarian. In today's world, where commodity hedge funds have become even larger players, Steve Briese's work assumes an even higher importance level for commodity market participants, individual and professional alike."
—Brent R. Harris, Head of PIMCO Real Return and Commodities Desk; Chairman, PIMCO Funds