Large Speculator Patterns (COT)

From Commitment of Traders Bible:

Commodity and hedge funds are notorious momentum traders, a reputation borne out by the COT data.

The natural consequence of this strategy, and the weakness in the funds’ approach is that they typically are caught holding their largest position—in the wrong direction—at market turns. For example when funds buy on a scale up, they naturally have a sizable long position to distribute. Although they would like to do so without moving prices against their positions, they cannot all liquidate at the top without depressing prices. Funds often run up big open profits because their algorithmic trading models catch major trends. But in the vast majority of cases, they end up giving back a large portion while waiting to confirm the end of the trend. Once they begin liquidating, they frequently do so en masse, trampling prices in the process. And this is just to take profits. More selling is then required for the funds’ algorithms to catch up to the new downtrend. (In futures trading it is as easy to go short as to go long.) The Commitments data is extremely helpful in gauging the state of fund buying and selling programs, often enabling the nimble to stay ahead of this rumbling herd.

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