A Better Way to Catch Swing Trades Using the COT

Much of successful trading, like economics, comes from making small changes that over time, affect the big picture. Today, we’ll discuss a marginal improvement to our Commitments of Traders swing trading calculations that improved performance across all of the markets we trade and that leads to big changes in the bottom line over time.

We’ve used roughly the same approach to swing trading for years. Our idea is that the commercial traders tend to know when their markets are over or, undervalued and act accordingly to improve the bottom lines of the businesses that they run. Obviously, the key to implementing this thesis lie in understanding how the market  being traded behaves along with the correct interpretation of the underlying market participants’ behavior. Therefore, we’ve focused on a select set of criteria that has, over time, provided the foundation of our swing trading.

Very simply, our rules have been as follows:

  1. We only take trades in the direction of the commercial traders’ momentum as calculated by the MACD in the third pane of the included chart.
  2. When market movement and the commercial trader momentum are at odds, we have a trade setup. For example, an overbought market as measured by the momentum trigger (2nd pane), during a period of negative commercial momentum provides a short sale setup. Conversely, an oversold market in the face of positive commercial momentum provides a setup to go long the market.
  3. Once the market begins to reverse, we enter in the direction of commercial momentum with the expectation that the market will return to its value area where we intend to take profits.
  4. We place a protective stop order at the recent swing high or low, to limit our losses if we’re wrong.

Not many methodologies combining daily and weekly data can be explained as simply.

Our improvement lies in the calculation of the positions within the Commitments of Traders reports. We’ve labeled our old trades with standard circles on the underlying chart and the momentum trigger points. The new trades are labeled with the letters, “RB” and “RS” for “Ratio Buy” and “Ratio Sell”, respectively.

This chart compares our previous swing calculation mode with our new model using the ratios of traders' positions within the Commitments of Traders reports to calculate swing points.
This chart compares our previous swing calculation mode with our new model using the ratios of traders’ positions within the Commitments of Traders reports to calculate swing points.

Notice that the two methods produce very similar trades. If there were a vast difference, we’d have to check our thesis as we’re still using the same data we always have. Also, notice that the new ratio calculation methodology picks up four trades that our previous rules precluded us from taking because the commercial trader momentum and momentum triggers didn’t line up. The most notable being the buy/sell/buy from April and May.

Currently, we have another situation where both methodologies line up which, again is what we expect more often than not. Both methods currently show commercial long hedgers entering the market to buy the copper necessary to meet their future business plans. We don’t want to get into a speculative argument about what a copper rally may or, may not mean. We’d simply like to catch the ride up towards $2.18 per pound and call it another winning trade.


This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

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