COT Charts, Great Info?

Very good thread. It is very helpful to know where the big boys are going and since there is no Forex wide volume indicator, COT is about the only way to look at Forex "volume". You hit on something that is key in technical analysis, that I think most people over look. The 4 hr chart is the smallest time frame that the big boys look at. If you want to be with a trend and with them, then that chart becomes very important. The 1 hr and 15 min are great for the short term scalpers and I do that myself, but I always try to be with the trend and that comes from the 4 hr and above. I am not saying that counter trends are not productive, but they are much riskier. The key to making and keeping pips is to decrease your risk, IMHO. Always trade what YOU see and don't let anyone make a decision for you. If the path is not clear to you, then wait... It will become more clear after the next candle. Having many tools at your disposal is great but keeping things simple is the best tool, once again IMHO.
Fly Safe and Get Your Pips!!

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Dollar- Showing Negative Bias although the Green Line has turned up. Key Interest Rate at 2.25% with expectations the FOMC will lower rates April 29th.

Euro- Great Positive Bias. Interest Rate at 4.00%. ECB expectated to hold rates.

JPY- Good Positive Bias. Means USD/JPY down. Interest Rate at 0.50%. Hard for rates to go much lower.

CHF- Positive Bias. Means USD/CHF short. Lines close together. Interest rate at 2.75%. I hear talk of possible future interest rate cut but nothing concrete.

GBP- Green line above blue line, however green line starting to turn down. Interest Rate at 5.25% with BOE likely to cut rates on April 10th.

CAD- Slope of green line massively negative with cross to downside likely. Interest Rate at 3.50% with BOC likely to cut interest rates in order to keep rates in line with FOMC.

AUD- Positive Bias. Interest Rates at 7.25%. RBA just raised rates, I don't here much talk about lowering rates. I recently read an article that said AUD and NZD rates are comfortable at higher levels, meaning the RBA and the RBNZ like to keep rates high.

Question about the dollar index:
http://cftc.gov/dea/options/deanybtlof.htm

We see a 28.3 to 45.7 open interest, so we're certainly seeing dollar weakness. But if you look at the change in open positions we've seen a slight increase (1438 in non-comm long, net positive difference of 1818 in commercial hedge shorts.

Wouldn't that imply weakness with a growing strength in the dollar index?

If so, am I reading this right?

Dollar - Stronger
Silver - Weaker against the USD
Gold - Weaker against the USD
Oil - Weaker against the USD
Loonie - Weaker against the USD
Swissie - Strong, little change against the USD
Cable - Weaker against the USD
Yen - Strong against the USD
Euro - Strong against the USD
Aussie - Strong, little change against the USD

I included silver, gold and oil since they seem tied to the USD so well.

If so, then we should see USDCAD up, USDCHF down, GBPUSD down, USDJPY down, EURUSD up, AUDUSD mixed... possibly up.

Now that's just w/ the COT, not considering rate changes. What do you think the rate changes will do (if they're cut) and where do you get your expectations at there?

With regards to your comment on the Dollar Index. I agree that the net position of the dollar index has changed to where the green line is rising and looks like it could cross the blue line signaling dollar strength. I personally don't read into the data that deeply when I interpret the COT charts. Mostly because the COT data is a couple days behind the market. I like to use COT data to identify trends that usually last a couple months to a year. Because of the COT data I have never traded heavily against the Euro. I only trade against the Euro after a long upward move and it looks parabolic on a weekly chart. If it ranges from there I will trade it short again once or twice. For me, the COT data just tells me that there is a higher probability that the large traders are going to either move the market up or down depending on which chart I am looking at. One more thing to add, be careful going long the dollar in the middle of these rate cuts.

I trust the crosses. When the lines cross I usually stop trading the currency until I am convinced the market knows where it wants to go. For a while there I quit trading the pound because the lines had crossed and they were not separating enough for me to feel confident. Now that there is a lot of talk about rate cuts in England I feel better about shorting the pound. I doubt I will short it against the USD because they are both weak currencies. I would rather short it against the EUR or the JPY. It really depends on your trading style, I go for about 100 pips and I can usually only get that if the market is trending. Right now the GBP/USD seems to be stuck in a range.

It is possible the change in net position your observing in the dollar index is due to profit taking by dollar bears. Could it be signaling a dollar turnaround? I don't know. I suspect the dollar will continue going down because of the interest rate cut on April 29th. I don't trade against interest rate cuts because I have gotten burnt really badly in the past. I feel like there is still more bad news the market will have to digest before we can call a bottom in the dollar, this is just speculation.

Once I know that a central bank is likely to change rates, that takes precedence over everything. The ideal situation would be a COT chart in agreement with the direction of the rate cut.

Personally, based on how I read the COT charts, I say,

dollar - down
oil - up
silver - up
gold - up
cad - down cot chart shows convergence, technically up but rate cut likely
euro - up
gbp - down cot chart shows convergence, technically up but rate cut likely
chf - up usd/chf down
jpy - up usd/jpy down
aud - up

Remember to buy really strong currencies and sell them against really weak currencies.

Also I don't really follow oil, gold and silver. Although, I agree gold and oil have helped me get a read on the Eur/Usd.

I really feel like the dollar is going to go down further. Realize, however, that my feelings about the direction of a currency can change very quickly. I trust the charts, right now the charts are showing dollar weakness. Am I thinking about the future dollar reversal, you bet ya. Think about it this way if you put a buy on the dollar and a sell on the dollar today, in a month, which one do you think would be profitable?

I get my info on rate changes from various sources. What's nice about trading the majors is that they all have the dollar in them so half of your work is following the FOMC. I suggest reading bloomber.com's currency news page once a day. The Economist is a fantastic magazine. Nightly Business Report on PBS is good. Find good free foriegn newspaper sights that have business sections. The International Herald Tribune is another good source.

A quick way to check on US interest rate expectations is to go to the CBOT website and click on the Fed Funds Rate Futures. Here is a link http://www.cbot.com/cbot/pub/page/0,3181,1525,00.html. To get the interest rate expectation you take 100 and subtract the value of the contract. I know the chart is hard to read but right now the April Contract is worth 97.8200 so 100 - 97.8200 is 2.18%. Our current interest rate is 2.25%. The April interest rate expectation used to be a lot lower which suggests the market is questioning whether or not the FED will lower rates in April. Remember that this number could change drastically at any moment.

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I also get a lot of Info from Forex Factory's Forex News Section. Just spend 15 to 30 min a day reading forex news and you will here about interest rate cuts.

Fundamental analysis is very important, but you still have to plan your trades using some technical strategies. Don't be afraid to trade against the overall trend if the market gets into an oversold or an overbought position. When trading against the trend you have to wait for the right setup and remember to wait for momentum.

Thank you for your insight.
How would you trade USDCHF and GBPCHF in the short term?
it seems that they both should go down since USD and GBP are weak curreincies and CHF is a strong currency.
How low do you think USDCHD can go?

By my interpretation I think both the USD/CHF and the GBP/CHF are more likely to go down. I am not going to actively trade the USD/CHF long until it forms a very nice bottom on a daily chart or a weekly chart. If you look at a weekly chart of the USD/CAD you can get an idea of what I am looking for. Until then I say the downtrend is still intact. Since there is a lot of talk about the BOE lowering interest rates I think the GBP/CHF is pretty good idea. This next week I'll be watching the gbp/chf and the gbp/jpy.

I think I will still trade the USD/CHF long when it gets really oversold on a weekly chart. Just a little counter trend trade. I will trade it with smaller lot sizes and tighter stops. I figure USD/CHF bulls will start to take some profit here at these levels. If the FOMC is done with rate cuts the USD/JPY and USD/CHF pictures could change quickly. We won't know what the FOMC is thinking until late April so I am not really thinking about USD long until then.

Ok that's very helpful. You're looking for when the commercial and non-comms pass an intersection... so that effectively the 2 positions have flipped. You compare that information with rate cuts and perhaps other key factors to get a "weight of the evidence" type analysis. If the 2 (and perhaps other data) correspond then that's a fairly strong long-term stance, unless of course they cross back (whipsaws are everywhere... laff).

From that... while I see short term strength of the dollar, I have no idea if that strength is just a temporary take-profit, or if it's due to a ledge formed by the recent federal reserve intervention, but I also doubt it's a complete reversal.

Anyway... so basically you're anticipating a rate cut and disregarding the conflict of data as just a short term bump?

I use fundamental study as part of my trading philosophy. I look for key areas of support and resistance and trade price action that corresponds to those areas (either regressing back-to, or bouncing away-from). But before placing a trade I like to understand what components are strong and what are weak so I can identify the underlying trend.

In general... if you're trading against the underlying trend you are exposed to more risk and your entries and exits need to be far more precise. On the other hand if you're trading with the trend you can get away with missing a perfect entry and still survive the trade. I prefer not to stare at charts all day, sticking with the daily TF whenever possible, and checking in as little as possible.

This turns my daily trading into nothing more than finding a clever entry into the overall trend... but that's a result that lets me live life outside of the candle forest. It means I start with a traditional MM (2%, 3% sometimes) and increase on further retracements... or exit when things change.


Yea that's a beautiful example. A steady down trend followed by a sharp rebound, then a long period of consolidation. Going to be interesting to catch the breakout. If it breaks above the 89 EMA, past the 100 EMA (both weekly TF) and doesn't fall below on the retrace... it's bull time.

The USDCHF looks in consolidation at the moment. Not sure how long it'll continue, but that will probably provide an answer to the "dollar... weak or strong?" question.

I guess you could say my COT analysis is a shotgun approach and I use other information to narrow my view. Your "weight of evidence" phrase is an excellent description of my method.

It sounds like we have very similar trading styles, although I am trying to focus my entries so i can maximize my risk/reward ratios. I spend a lot of time in front of my computer and I enjoy a good walk through the candlestick forests.

On the COT charts I like to keep it very simple...simplicity there has served me well.

I think trading with the fundamentals takes all the stress out of trading. That and using proper money management.

I am not trying to guess whether or not the Usd/chf will break down further, but I believe the trend is down until more evidence to the contrary becomes apparent.

"if you are trading against the underlying trend you are exposed to more risk"
well said Rabid.

And I agree, the greatest thing about a trend is you can be totally late to the party and they still let you in. Though you still make more money when you time it right.

One more thing, I don't wait for an intersection. The EURO hasn't intersected in quite a while. When they intersect I usually have to wait because the currency is ranging at that time. If, however, there is an economic driver that will move the currency I will trade the currency immediately.

Any thoughts on the gbp/jpy for the coming week?

First I want to say that I am a very conservative trader. If your not already in the usd/chf and gbp/chf it's probably too late to get into it now.

Personally I am going to look at the GBP/JPY and the EUR/GBP. Of all the pairs I think the EUR/GBP is the safest one to trade right now. Later in the evening after the price moves around a bit I may see something I like. I am going to start another thread with a friend and we are going to give some trade ideas. I trade from about 12 am EST until about 11 am EST so if your up around that time shoot me a message and we can discuss the usd/chf and the gbp/chf but until I see some price action I am uncomfortable with those two pairs.

Thank you for your answer.
We can talk about it during the times you have indicated.

Come check Jon and Karthik's Trading Corner...I am going to start discussing currencies there at night.