What traders are really doing?

Instead of looking at raw volume, though, you can look at the Commitment of Traders (COT) report and make some educated guesses about how to trade certain situations. You won’t get a price forecast, but you will get information that is directly relevant to your trading.

Take, for example, the period in July 2005 when the euro futures (EC) were trading sideways in a range from 1.1980 to 1.2290. Every three to five days, the price reversed. In the first week of August the euro rose above the range’s resistance line. Breakouts must always be respected, and a long trade executed in the next six days probably produced a profit, since the euro put in a new high at 1.2505 on Aug. 12.

But look at the top window of the chart. This shows the net long or short positions held by three types of traders defined by the Commodity Futures Trading Commission (CFTC): the “commercials” (blue); the large “non-commercials” (green), otherwise known as large speculators; and the small non commercials (red), who are mostly small speculators (i.e., retail traders).

The green non-commercials are net short 24,842 contracts the first week of July, while the red small speculators are net short 2,522 contracts. Offsetting the two short groups are the blue commercials, who are net long 27,394 contracts. Now look at the next week. Everyone has downsized their positions, and they continue to do so until the first week of August, when the total number of contracts is only 2008, or 10 percent of the level the month before.

Yes, breakouts must be respected, but in this case we see they can’t always be trusted. If the green speculators really thought the euro rally was going to continue, they would have bought more contracts. They did go from net short to net long, but only for one week as price was peaking, and then they went short again. Accordingly, the “feel” of the market is not really all that bullish. In fact, nobody seems to have much sentiment at all. Also, liquidity is low, meaning if you make an off-market bid or offer, it will probably just sit there and not get filled, whereas in a highly liquid market, there is always somebody who will shoot at anything that moves.