This content explains how to interpret the Commitment of Traders (COT) report, specifically focusing on commercial traders' positions, to gain insights into market direction beyond simple net long or short indicators. It emphasizes analyzing hedging programs within broader buy/sell programs by combining COT data with institutional order flow and price action analysis.
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so can we talk about the commodity
markets it's very important that you
read just disclaimers
everything that's being discussed in
this segment of our discussion on
Commodities any trade
discussion or idea or concept should be
viewed in the light of a paper trade not
an actual trade I'm not a CTA so I'm not
licensed to get trade advice about
Commodities but I'm sharing ideas on how
I've looked at the commodity Market over
the last 20 plus years and where I've
seen consistency finding directional
okay all right so we are in the first of
the June 2017 content ICT mentorship uh
this is ICT commodity trading lesson one
commitment of Traders how I use the data
okay and the first thing we're gonna be
looking at is the raw data now when we
look at the commitment Traders report uh
what is that well the raw data comes by
way of a weekly report released by The
cftc and you can find this on
www.cftc gov
and what you want to look for is you
want to be looking at the Futures
Contract only in the short format and if
you do this under the CME which is the
Chicago Mercantile Exchange we can find
the currencies that trade as Comm dials
and one of the Comm dials are
Japanese Yen and this is the most recent
short format
commitment of Traders report for the
Japanese Yen
as you can see here this is just for the
Japanese Yen Futures Contract now the
cftc website gives you the opportunity
to pull up the options positions as well
I'm not concerning myself with that I
never concern myself with that at all I
look at only the Futures positions and
you want to be looking in the center
column here where it says commercial
and when you see that commercial area
it's going to give you a little column
that says long to the left and then
short to the right directly underneath
that long column you'll see that there is
is 143
143
450 contracts that's the commercial long positions
positions
and then to the right of that underneath
the short column it's 76 426 contracts short
short
the way we get the net position is we
subtract the two to get the difference
and if it's a positive number it's net
long if it's a negative number it's net
short in this case we have 67 024
contracts long that by the difference
between the long positions and the short
position so there's a a net long
position of sixty seven thousand twenty
four contracts long
now basically this tells us nothing
about their current hedging program so
what we have to do is have to look
deeper and go behind the numbers and see
okay net Trader's position line chart
and with this chart we can track the
three main classes of Traders
and again you would find this on
www.barchart.com you see me use it many
times in the past
and what you're going to be doing is
you're going to be plotting a daily
chart and you'll be including in the
indicator portion on the bottom of the
chart you're going to be adding the net
Trader's position line chart
and the duration you want to be
displaying is at least one year's worth
and the commercial Traders are typically
on bar chart.com shown as the red line
at the bottom of the chart
the large Traders are shown as in a
green line and the small speculators are
always shown in as a blue line
but when we look at this price action
against the
net Trader position line chart I want
you to visually see the hedging programs
by the commercial Traders now when I
first got into trading obviously my
mentor was Larry Williams much like
everyone else uh that's ever come across
his material uh he's like The Godfather
if you will of the cot data
so everything he mentioned in his 1970
book how I made a million dollars
trading Commodities last year using the
commercial information that was like
light years ahead of everything else
naturally everyone you know flocked to
just looking at whether the commercials
are knit long or if they're not short
much like everyone else I found out by
trial and error that it isn't that easy
you gotta go in there and do some more
research I thought clearly by looking at
the commercials uh if they were buying
so therefore I had to be a buyer too but
because their nature
of what they are as a as a participant
in the marketplace they are usually
large corporate producers or users of
Commodities and you know Commodities
like a Comm dial is the same thing uh
currencies are a commodity they're
they're bought and sold they're provided
for in terms of allowing Global Commerce
uh you know providing loans
making transactions all over the world
and because there's a difference of all
these countries around the world there's
going to be a change from one currency
to the other to do business or make
transactions in another country so just
like we would look at for instance like
Coco for Hershey where they make a large
uh production of chocolate you know
every day their number one you know
ingredient is sugar and cocoa so if we
follow those Commodities you naturally
cocoa is going to have a lot of
fundamental supply and demand factors
that go along with it and Hershey's
going to have a trained accredited staff
to track all those things to be able to
you know keep a closer eye on whether
the price is really cheap or it's
expensive if they think it's going to be
expensive in the near future they're
going to be much more aggressive about
buying it because they want to lock in
lower prices because they know at a
later time prices will go higher the
same thing occurs with currencies so
if we look at the net Trader's position
line chart it gives us a graphic
depiction of the overall net basis the
numbers are they above the zero line or
below this Airline
by itself it doesn't mean anything but
when we look at the information a little
bit closer in a different light you'll
have a lot better understanding about
so that brings us to the commercial
hedging so naturally if we pull up a bar
chart.com chart of the Japanese Yen and
you put the net trade Association line
chart one the chart itself with about
one year's worth of data this is what
you get so
so
by itself again it means absolutely
nothing you can see between today's
present date of June 5th 2017 and
December of 2016 the commercials the red
line at the bottom of the chart shows
that red line above the zero line
that zero line delineates whether we're
net longer net short so if that red
lines above the zero line from December
2016 to present time June 2017 that
means that the commercials have been net
long for over six months so
so
what does that mean you buy I'll only
just buy it doesn't mean you just buy
there's other things you have to look at
but by itself it means that they are in
a buy program okay so there's a buy
program and then there's hedging
programs the buy program is a
macro perspective or macro program where
they focus the bulk of their buying and
while they'll hedge and sell some
they'll be hedging in prices by selling
the shorter term
can be seen by looking at the 12 to 6
month durations in other words we look
back a year to see what they've done the highest
highest
net long position and the lowest net
long position they've had and the lowest
net short position and the highest net
short position they've had so we break
the market down in two categories what
was their action above that zero line as
a whole what was the highest reading in
the lowest reading while above the zero
line and what was the highest reading in
the lowest reading below the zero line
so there's a buy program when they're
above the zero line in a Cell program
when they're below it but there's also
hedging that goes on Commercial hedging
programs that we need to be aware of and
you can track them by using this
information but you have to look at it
differently you can't look at it like
this because this is what retail sees
obviously retail isn't going to have the
the true perspective on what price is
doing from a commercial or institutional
perspective so what I have to do is
change your perspective on how we look
at it so let's take a look at it closer now
now
so okay what we're focusing on here is
the bottom of the chart these three
lines here again they represent the
green line is the large speculators big
large funds or big private traders that
have a lot of position size small
speculators with the blue line that's
usually this uh the public they have no
idea what's going on and in the
commodity commercials or large
speculators in terms of like a
commercial user or producer of a
commodity in this case if it's a bank
okay our lending institution they would
be in that red line
so the red line is really what we're
going to be tracking we're only
interested in that line we don't care
what the green line is because it's
always going to be diametrically opposed
to the actions or positions of that of
the red line and the blue line we could
care less about because that's the
street money less informed crowd
so what I've done here is I've removed
okay by way of paint and you can do this
if you want to but it's not necessary
once you understand the procedure or
process that you go through by looking
at Price you won't need to do this over
time you're just your eye will be
trained to be able to look at this and
be able to see it on its own and you'll
know just by looking at a standard
Trader system chart
it'll jump off at the quick first glance
you'll see exactly what's going on
without having to do all this you know
acrobatics I'm going to show you with
removing the lines with paint it's not
necessary but I'll say this before we go
into it for those individuals that
really want to have this data and be
able to use it like this and see it
graphically you can start collecting the
data and you can download historical
data for all the Commodities that you
want to track and for those individuals
that are in here they're only interested
in the currency markets if you like your
favorite pairs just download historical
data about the net trade assessment
um for that particular currency and for
instance say it's a Japanese Yen you
want to be a specialist in you can
download years worth of data on cot data
and plot the commercials net long
positions and net short positions and it
would look like like this you could plot
it with Excel something like that
and I'm certain some of you guys that
are really uh you know Cracker Jack with
uh programming for mt4 you could
probably create an indicator that does
this you know where it plots the uh net
Trader's position for the commercials
only that way you can get a range and
determine what the highest high and the
lowest low is in the last six months in
the last 12 months and be able to get
that range to Define that like we're
going to discuss here but without having
to do all that it's not necessary but if
you want to do it there's things like
that you can do but what I do is I
quickly look at the chart and I see it
as I'm going to outline it here so
obviously we have about a Year's worth
of data here and you can see the red
line is the commercial activity and
right in December uh rated before
actually December right like the last
week of November you can see they swung
from net short position below the zero
basis line to net long in the last week
or so of November 2016 then they've
remained above the zero line from that
point on to now
so again by itself it doesn't tell us
anything and this is the reason why
people walk away from cot data they say
it's useless it's always hindsight it
can't be used in you know in terms of
being able to have prognostication about
what price is going to do and we're
going to dispel that disbelief in this
teaching here so what we're going to do
is we're going to focus on when the
Market's below the zero line okay so
zero line basis below zero is when the
net position is bearish or short the
position above the zero line okay or the
Net Zero Sum basis is going to be
bullish okay or they're net long
when we have those conditions there's
going to be things that we can do to
look for optimal optimal trade entries
okay not the optimal trade entry pattern
but for optimal trade conditions for entries
entries
so we're going to look at this price
action segment here and I want you to
follow along with me okay we're going to
look in this whole portion of price
action a lot closer and use this
information just like we see it here on
this chart we're going to change it
slightly in terms of the perspective but
wait we're not manipulating the data at
all we're just really zooming in and
looking at it from a hedging perspective
because there's a hedging program that I
want you to see in price action that you
can track with this net
some zero line and whether the
commercials are net longer and that
short and the activity of their net positions
okay so this is January 2016 all the way
to January
2017 okay and what we're going to do is
we're going to take this entire price
action and we're going to divide it in
two segments we're going to do the first
portion up to January of 2017. we're
going to start around
um well beginning of the year 2016 I'm
going to break that down but before we
get into it I want you to look at what
price was doing the whole first half of 2016.
2016.
if you were looking at that and
obviously we had the benefit of
hindsight here but for the sake of argument
argument
looking at institutional order flow
were the bullish order blocks being
respected and were up close candles or
what would be deemed as a bearish order
block were they being broken in other
words are we seeing price being
supported by discount arrays
clearly beyond the shadow of a doubt
it's there so we know the institutional
order flow was bullish from January 2016
or February 2016 when price made that low
low
and all the way through
until around the mid-july going into the
summer months there was a small little
pullback that broke a short-term low and
then price resumed higher again and it
had a lot of issues with getting above
the 1.00 level on the Japanese Yen which
we'll look at at the end of this
teaching why it struggled with that
level and finally reversed but we can
see how institutional order flow was
bullish every time a short-term low was
taken out price rallied any time a price
trade down into a down closed candle it
was supported as a bull shoulder block
and all of the premium PD arrays were
always broken through there was no
premium effect that was lasting
but if we look at just the cot data down
here the commercials the red line that
was below the zero line so that would be
telling us to do what go short based on
the traditional perspective of
commitment Traders and this is why
everyone discounted Larry Williams stuff
for a long long time and still do today
and if you look at how I'm going to show
you how to use this information it takes
cot data to light years ahead where
everyone else doesn't even see it like
this they don't even turn they don't
interpret price like this they don't
interpret CO2 data like this but this is
exactly how you track what their hedging
programs are so while they had a cell program
program
because they're below the zero line or
the zero line basis was bearish because
they were below zero line from January
February 2016 all the way to the last or
middle week of November 2016. you can
see that graphically with the red line
going above the zero so while they have a
a
bearish or sell program going on at the
time for many months they were selling
heavily okay as the market was rallying
they were keeping cell program active
but you can still see institutional
order flow being bullish now this is
what's going to confuse some of you okay
we're going to cover the details later
in this teaching but for now what you're
focusing on primarily is was the
institutional order flow telling you
it's going to tell you whether there's
buying or selling going on by Price
action alone
what we're going to do is decipher that
from a cot standpoint okay and add that
filter process even though that the cot
data is below the zero line
for many months okay we can still fare
it out when the commercials step in and
do aggressive hedging and buying even
though they're in that below zero line
or a cell program you can see when they
get aggressive and buy
and cause price to go higher while still
keeping the cot data below the zero line
so anyone tracking the commit
administrators report for the Japanese
Yen they're not following along
in other words it doesn't look germane
to them it's completely alien it doesn't
make any sense the Japanese friends
rallying rallying rallying but they're
holding a net short position by the
commercials how can that be why is that
happening well the commercials
again they could be Banks they could be
selling uh currency you know providing
liquidity all that's being reflected in
these numbers as a net basis so just
because they're below the zero line
doesn't mean that we can't see buying
and sell as well because it can happen
on both sides of the marketplace
but anything above the zero line that's
and we would have to consider anything
below the zero line bearish but we do
not limit ourselves to just focusing on
selling only below the zero line or
buying above the zero line because you
can do both the way you decipher it is
what is institutional order flow at the
time what are the conditions right now
suggesting in price action if bullish
order blocks are being supporting price
any lows that are being taken out reject
price as a stop run on sell stops and
then all of a sudden it rallies and
breaks through will be otherwise deemed
as a premium array then institutional
order flow is bullish and you can see
buy programs kick in
in a hedging program while a larger cell
program is underway now again let me
rephrase that
a larger long-term cell program can
still have bullish hedging buy programs
in it
and you'll see that now as we go through
this segment of price action for the
Japanese Yen
okay so what I have here is I have price
trained in on that segment of price and
I removed the
large speculators line and the small
speculator's line
so that way we can highlight
all of the price action by way of the
net Trader's position line chart on the
commercials which is the red line here
now I want you to see how price stayed
higher going higher making higher highs
and and finding support at both shoulder
blocks running out short-term lows and
then rallying but finding their way
through any high or premium array so the
institutional order flow all the way
through to the middle of August going
into September was bullish
but how do we reconcile this net short
position by the commercials because
they're below the zero line it doesn't
make any sense unless we break it down
and use the six month range and the 12
month range idea of looking for the
highest and the lowest reading on their
net position by the commercials we don't
care about what those long-term uh
speculators that uh you know are in the
blue line we don't care about the small
specs we don't care about the large
specs we're only caring about what the
actions of this red line is because it's
going to show us and reflect what their
hedging program is at the current time
so anytime when you're looking at cot
data you want to look at where we're at
right now and go back six months because
there's your six month hedging program
they have a 12-month hedging program so
by blending the two you can get
short-term quarterly effect trades now
think we talked about that there's
quarterly effects every three or four
months there's a shift in Market
structure and the market trades in a
sustained move
for about two and a half months or so
maybe three months but every quarter or
so of the year there's a shift in market
structuring and this helps you find that
by looking at the six month range of the
highest high and lowest low the
commercial net position has been
that is seen with this shaded area so
you can see the highest high and the
lowest low is being basically blocked
out with that shaded area so once you
know what that is you divide that in
half you get that range so we can go
back 12 months and in six months
intervals but in here you can see how
the net positions have stayed in a very
tight range even that can tell us a gold
mine worth of information
look what suddenly happens when you
decipher the information like this you
do not see CO2 data like this and Larry
Williams doesn't even do this with CO2
data this is something I looked at Price
forever and I knew there was something
going on behind the scenes and I
literally said you know what if
price can trade in trading ranges
so can this information but if they're
going to be doing buying and selling it
can't be hidden if that's true I should
see it if I look at the data in terms of
the range or time remember ipta well I
applied similar things to this so I
looked at six month intervals and 12
month intervals three month intervals
four four months sorry four year
intervals three year intervals two year
intervals one year interval and then six
month intervals
so if you go back through the data and
you look at it like that you'll get a
clear depiction of what the commercials
are actually doing
now if you look at these green little
nodules in here okay even though that
we're below the zero line by determining
the total range in the last six months
in the last 12 months we can get every
time their hedging program kicks in even
though there's a larger cell program is
underway by keeping the net positions
below zero
their hedging program can be deciphered
by looking at these little nodules once
you determine the range
the first one here you can see how all
that bind took place
the second one here you see where they
made a low there it bought off of a
bullish order block that was seen in the
last week of April filling in a void
and we had this area here where they
were buying again after we've taken out
a short-term low it was seen in the last
week of June and price resumed but then
found long-term resistance at that 1.00
level which we'll look at at the last
slide of this presentation and you'll
see why clearly that had a struggling
point there and we're finally reversed
by breaking a short term low only after
trading at that 1.00 level a few times
failing to get above it and finally
breaking Market structure to a downside
and then you can see the commercials
finally started building up a larger net
long position above the zero line so
there's zero line basis is now bullish
so now they're in a buy program but
they're going to be hedging early they
start doing it early but they make the
highs and the lows in the markets by
so now we're going to look at the last
week or so of November 2016 all the way
to present time
and again I'm going to counsel you to
look at what the cot data looks like by
plotting a
net traded physician line chart as
everyone else would do with this with
the information that you would get with
uh commitment trades reports
this is what it would look like if you
zoomed in on a daily chart again it
doesn't tell you much except for it
isn't that long and granted they have
been sending the Japanese Yen higher as
a result of that but what was
institutional order flow as well
our down candle supporting price when it
trades back down to it our up close
candles being broken as PD arrays our
old highs being taken out and are we
seeing support by Price moving down into
what would be otherwise a discount array
yes we're seeing that all throughout
this entire price segment from the
midpoint of January I'm sorry the
midpoint of December
going into the January where we made
that turning point now commercials have
really moved to a net long position now
they're in a buy program but now because
we're in a buy program does that mean it
can't sell off no it can have sell-offs
but we're going to focus primarily on
what is the range the last six months
okay of the commercial activity but
first we got to focus on what that looks
like so we're going to take everything
down to just the commercial line and I
removed the small specs line and the
large speculators did not manipulate the
price or do anything with the indicator
all I did was erase everything with
paint so that way we can clearly see
what's going on
I want you to look at by taking that
information determine the highest high
and the lowest low in the range defining
that basis line creating its own new
basis line we can see where the buying
kicks in and you see nodules kicking in
in January we can see one in mid-march
and we can see one in the last week of
May and those are the respective time
periods where the market sees the
greatest in advances in price going higher
all through here Market was bullish
all through here we're currently bullish
as well if you look at the price of
Japanese Yen right now and go to the
left in the last week of April this year
you can see there's a fair value Gap up
there at 91.50 so it kind of gives you
an insight about where we think based on
what we're talking about here where a
Japanese Yen might go at least on the
short term
and we're using the hedging program as
so when we look at commercial hedging
we're not looking just at whether
they're not long and that short but that
does give us the buy or sell program
that they're operating in but inside
that buy and sell program
or buy and sell program I should say
like that there are hedging programs
that go on because their nature of their
speculation in the marketplace is to
lock in good prices for their
manufacturing of commodity or a good and
to do that efficiently they have to make
sure prices are obtained at very
discount or
friendly levels you know you don't want
to be buying if you're cursing you don't
be buying cocoa later on when you've
already seen fundamentals are suggesting
it's going to be higher six months from
now or a year from now you're not going
to be doing all your buying then you're
going to allocate a lot more money now
to buy UPS uh stock for that so that way
when prices go higher you've made a
better return on your investment and
keeps cost low and that's the nature of
hedging so the same thing happens with
the banks and lending institutions you
know the value of money is going to be
fluctuating all the time so they're
trained accredited staffs that do those
types of things
they will invest and buy and sell based
on those
Notions that they're supplying demand
factors that they have an assessment on
I'm not smart enough to know what they
are I've never claimed to know that and
you're never going to know that from me
because I I don't know it personally but
I can see what they're doing graphically
and they can't hide it from me and now
because I've shared it with you you can
do the same thing there's nothing that
they can they can't hide it from you
there's nothing to worry about they're
not going to be able to hide in the
future because you now know how to do it
it's just the data
while Larry Williams back in the 70s and
60s you know he had
figured out then but only at extremes
and that's what I'm going to say in in
closing here when we look at the
commitment of Traders report
and we applied on uh Traders
uh basis whether it's a net longer net
short on the commercials if we get to a
four-year extreme or a two-year extreme
or a 12-month extreme generally there's
usually a long-term Trend reversal at
play and the commercials will sometimes
factor that in with their own
movements in the marketplace
by having those extremes we will
discount any short-term hedging program
if we get to a four-year two-year or one
year extreme of the highest high and the
lowest low of their net positions
but let's look at this segment here
again a little bit closer where the
commercials were below the zero line
and this section over here where they're
above the zero line when we see those
conditions okay the red line that's a
cell program the red shaded area when
it's like that below the zero line that
is a cell program doesn't mean you can't
see buying going on but you have to look
at in the form of the hedging program
that goes on look for the small
short-term ranges and when they go above
the new range that you would Define as
we just mentioned in outline a moment
ago you can see where they're buying and
selling is taking place
below the zero line the best conditions are
are
looking for shorts that means if you can
get institutional order flow bearish you
want to look for net short positions by
the commercials and at premium erase and
that would be the ideal scenario but you
can still get by hedging programs inside
that long-term Soul program and again I
know this is going to confuse some of
you but you're gonna have to watch this
video several different times because
you're going to see
by looking at it multiple times and
listening you'll see that there's two
factors taking place here long-term buy
and sell programs based on the Zero line
whether above or below it and then they
hedge even during those periods because
they're not just buying all one time and
selling all one time they're moving back
and forth in the marketplace around
specific price levels when they create
these nodules in the hedging program
those levels are significant in the
future they're going to be key price
points as a PD array
make sure you have that in your charts
and note them by using the cot hedging
program technique that I just taught you
here in the green shaded area that is
ideally going to be seeing the best buys
when the market is creating discount
arrays and institutional overflows
bullish but it doesn't mean you can't be
selling short when the short term six
month or 12 month range indicates that
the commercials are net short in the new
adjusted range as in other words we
looked at the last highest high and
lowest low in the last six months and 12
months even if they're above the zero
line while that's a bullish buy program
long term they could still be doing
short term selling hedging programs in
there and it causes price to go lower
but you have to look at things in terms
of blending three different things
you're looking at the program of buying
and selling whether they're above or
below zero line then you look at the
hedging program based on the range of
the highest high and lowest lows of
commercials in the last six months in
the last 12 months and then using
institutional order flow what is price
telling you is it respecting discount
arrays or premium arrays
and by blending those things you can get
to the truth of what the Market's
actually doing and you'll know what
institutional order flow is with the
so commercial hedging programs you know
if commercials are above or below the
net sum zero line both sides of the
market can be traded
the current range of the commercial's
if institutional order flow is bullish
we're going to be blending discount PD
arrays and the last 12 or 6 month net
long commercial readings for long trades
now again that's when we see those
little bullish nodules in the new
defined range again this can be ideally
seen when we're above the zero line
if institution order flow is bearish
we're gonna be blending premium PD
arrays in the 12 or 6 month range of the
net short commercial readings for short trades
trades
the best conditions are seen when both
net sum basis agree with institutional
order flow and PDA rate Matrix confluences
the long-term commercial activity
the net sum zero line delineates the net
buying and or net selling now retail
traders that know about the net Trader
Association chart only look at whether
commercials are that long for
bullishness or net short for bearishness
on the market
the smart money can be tracked by
focusing on the 12 month and six month
range of the commercial net position
if the commercials are above Nets zero
line we're gonna be focusing on the 12
to 6 month net long readings
if commercials are below the zero line
we're gonna be focusing on the 12 or 6
month range net short positions we blend
these conditions with pdra Matrix and
institutional order flow for optimal
results in directional analysis so with
this teaching what we've done
it's we were able to decipher what the
commercial actions are whether they're
buying or selling and not relying so
much on whether they're below or above a
zero line as everyone else interprets
price using this information
looking at that one zero zero level here
we can see how price went back to the 2014
2014
January highs and July highs and cleared
out those equal highs and fell short
from that position all the way down to a
level that was seen as a discount array
in the January 2016 time period
this is a weekly chart so everything
that we teach in terms of PD arrays
institution order flow all those things
get Blended together to get optimal
results and now you've entered the Inner
Circle as it relates to
hedging commercial activity and cot
until next time I wish you good luck and
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