The COT includes data for both Futures and Options positions held by commercial, non-commercial and non-reportable positions.
The forex market is an OTC market so brokers and dealers negotiate directly with each other because there’s no central exchange or financial institution. Without a central exchange, keeping track of Futures data provides a superb opportunity to trace flows .
To create your own COT Indicator the followings steps are required to be followed:
1. Time Period: One of the most vital point to remember is to decide how long of a period one wants to cover. The more values the trader inputs into the index, the less sentiment extreme signals he or she will receive, but it will be more reliable. Having fewer input values will end in more signals, although it would cause more false positives.
2. Calculation: Calculate the difference between the positions of large speculators and commercial traders for each week.
The formula for calculating this difference is:
Difference = Net position of Large Speculators – Net position of Commercials
Keep in mind that if large speculators are extremely long, this is able to 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 most likely extremely long. this would result in a negative figure. This would result in a negative figure.
1. Rank these results in ascending order, from most negative to most positive
2. Assign a value of 100 to the largest number and 0 to the smallest figure
Once the values are assigned to every of the calculated differences, the trader should always be alerted whenever new data inputted into the index shows an extreme, that is, 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.
It is important to know whether the trend will continue or will end. If the COT report reveals that the markets are at extreme levels, it might help pinpoint those tops and bottoms.