Psychology, Price Action, Correlation, and COT

In this thread I would like to share my point of view on four main topics:

1. Psychology and trading mindset. If we dont understand ourselves how can we understand the market? If we cannot control our own emotions, no trading system will work for us because we will never be able to follow it precisely. "Trading in the Zone" by Mark Douglas is a must read book in this section.
2. Price Action. Instead of using a lot of fancy indicators without clear understanding what they mean, I prefer to analyze the source of all the calculations in these indicators the price itself. Bob Volman provides very good overview in his book "Understanding Price Action".
3. Currency Correlation. Because on Forex we are trading pairs consisting of 2 currencies, they both influence the performance of the trading pair in question. Accordingly there will be correlation between 2 trading pairs if they share the same currency.
4. Commitment of Traders (COT). For long term analysis we have an indicator that adds some new to our trading system, instead of recalculating the price. COT data allows us to watch the change in positions of large speculators and analyze the price action with that in mind. "Trade Stocks and Commodities with the Insiders" by Larry Williams and "The Commitment of Traders Bible" by Stephen Briese are two books I recommend.

From these four topics, Psychology is by far the most important one. To me, the other three are useless without understanding of human psyche. When we analyze the Price Action, I am not looking for some candle patterns. Instead, I am trying to think about the traders who stand behind the price movement in each candle, their reasons to be bullish or bearish, where they are likely to take profit or loss and their emotions.

COT data helps us to see the actual change in positions of really large traders, who influence the price greatly. Once again, I do not believe there is some unique trading pattern in this data that will help making money all the time. Instead, I am trying to understand their psychology as well.

A couple notes about the general direction of this thread.

1. I am not planning to provide any trading signals here whatsoever. Instead, I am planning to review the markets together and gain increasing understanding of the whole picture. The individual trade entries are up to you. In that sense, I am not really trying to show my trading system per se. I am simply trying to show an alternative view at the markets, a framework that we can operate from.
2. The discussion I would like to have here is aimed for mid to long term trading. The main analysis timeframe is weekly, with Daily being used for entries and H4 for further price action clarification (sometimes entries are taken on H4 as well). The analysis takes considerable amount of time but there should be no need to watch the live market non-stop, looking for entries.
3. I will discuss Money and Risk management as well, explaining my point of view on profit expectation and emphasizing that your goal #1 should be survival on the market. Play good defense before you play offense. I am also hoping to show that it is possibly and feasible to trade weekly trends even with a very small account, starting as low as $5000 (0.01 lots will be necessary though, but even 1:50 leverage is plenty).

Basically, the thread will consist of articles on psychology, trading business, money/risk management and regular market analysis (if all goes well, that is). We will use all major trading pairs (all EUR, GBP, AUD, NZD, USD, CAD, CHF and JPY pairs). I hope to update the first post later on with relevant information as the thread will start taking shape.t

Getting Started
To get started all you need to do is understand what COT is about. On my charts I use freely available indicators from Meta COT project: https://www.mql5.com/en/articles/1573
This is a big article and took me about 2 weeks to completely absorb when I started. It is essential to read it all, because the instructions on how to get started with COT indicators are there as well. My suggestion is to do it gradually, 30-60 minutes a day. The updated source code for the indicators is here, if you want to explore all Meta COT project: https://www.mql5.com/ru/articles/dow...14_03_2011.zip

Simple installation

After going through all the available indicators many times in addition to writing a couple of my own I decided to go back to the basics and simply try to do a psychological analysis of market Price Action in combination with Absolute positions of Large Speculators (Non-Commercial, NC for short). Therefore you do not need to install the whole Meta COT project if you simply want to follow this thread.

This archive includes only the necessary indicators used on all my pictures together with a template.

The contents:

1. COT Absolute positions indicator and all COT files necessary for its work.
2. Auto pivot indicator that I wrote for higher charts. It will show Yearly pivots on Weekly chart, Montly pivots on Daily charts and Weekly pivots on H4 charts. This indicator is used in all pictures for Sup/Res reference.
3. Template with COT indicator set up for EURUSD as an example. See below how to set it up for other pairs. The template is setup with Pivot indicator and 3 EMAs as well.

Installation instructions:

1. Open your MT4 data folder (in MT4 press File -> Open Data Folder);
2. Extract the archive right in that folder. It will automatically put one template into /templates, indicators into /MQL/indicators, scripts into /MQL/scripts/ and files into /MQL/files.

Now you have the tools setup, but in order to use COT you need the data. I downloaded and compiled all the COT data starting at 2004. I will be updating the current data file in this thread as it is being released by the commission. When unpacked, data files should amount to ~82mb. This archive does not include data for 2015, since we will need to update it weekly (see below).
Because the data archive is too big, here is an alternative download location:
COT data 2004-2014

I was not able to upload it as attachment.

Data installation:

1. Open your MT4 data folder (in MT4 press File -> Open Data Folder);
2. Navigate to /MQL/Files/
3. Extract data archive there. It should create 12 data files.

These steps must be done any time you update the data (first installation and later each week when you load new data file):

1. In /MQL/Files/ folder run erase_cot.bat file - it will delete any data that was created before.
2. Open your terminal and run "Meta COT Script Build" script on any chart
3. Run "Meta COT Script Concatenate" script on any chart
4. Restart terminal

2015 Data file updates

Each week we need to load a new data file to update the indicators. Here I will be updating this data file, already formatted and renamed. All you need to do is to extract it into /MQL/Files folder and update the data, following the same instructions above. Because there is one data file for 2015, it will ask you if you want to rewrite the old file when you do the updating - answer 'yes'.

Working with the indicator

Open any chart and load "COT_abs_position" template. By default it will load the indicators for EUR and USD futures. When you switch the trading pair, the COT indicator will stay the same, as you need to tell it to load the right data file. In the settings of the indicator there is a "file_name" parameter. Here is the list of file names for all 8 major currencies that you need to use:

1. EUR - "COT - EURO FX CONCATENATE.csv"
2. GBP - "COT - BRITISH POUND STERLING CONCATENATE.csv"
3. AUD - "COT - AUSTRALIAN DOLLAR CONCATENATE.csv"
4. NZD - "COT - NEW ZEALAND DOLLAR - CHICAGO MERCANTILE EXCHANGE .csv"
5. USD - "COT - U.S. DOLLAR CONCATENATE.csv"
6. CAD - "COT - CANADIAN DOLLAR CONCATENATE.csv"
7. CHF - "COT - SWISS FRANC CONCATENATE.csv"
8. JPY - "COT - JAPANESE YEN CONCATENETE.csv"

Let's say you want to switch to AUDNZD, therefore you want Blue and Red lines to show Long and Short positions for AUD and Green and Orange to show Long and Short positions for NZD. Follow these steps:

1. Double click Blue or Red line on the indicator to open its settings
2. In file_name parameter enter "COT - AUSTRALIAN DOLLAR CONCATENATE.csv"; press OK
3. Double click Orange or Green line to open the second indicator
4. In file_name parameter enter "COT - NEW ZEALAND DOLLAR - CHICAGO MERCANTILE EXCHANGE .csv"; press OK

Ideally though, just create a profile for all the charts you want to watch, set the indicators one time and never worry about it again. I personally use Currency profiles: one for all EUR charts, one for all GBP charts, USD charts, etc.

Additional information

Why Speculators and not Commercials? I am interested in understanding of the psychology behind the positions and when I see the NC being heavily on the long side while the market is going down I know they are losing money and not liking it. Together with price action analysis this can be invaluable information. Commercials, as you know, may seem to lose all the time but they are on the market for different reasons - they hedge their risks. Therefore it is more difficult to predict their actions and more importantly their reasons.

Why not Net positions? Simply because I would like to see when one side starts moving, it gives me a little bit more to think about.

One unorthodox element in my analysis is that for each pair I analyze COT data for both currencies. I realize that COT data is published for currency futures and EUR COT data corresponds to EURUSD pair. However, I found that knowing the COT data for USD is just as important. On Forex we don't trade the currencies - we trade the difference between 2 currencies and so analyzing them both seems logical. This also allows me to speculate about the influence of COT on cross pairs, such as EURGBP or GBPNZD, etc.

The legend explains the COT indicator, which shows Long and Short positions for AUD and USD currencies separately. On the chart I use 3 EMAs (20, 100 and 200) and Pivot points - only to watch the price action around these potential levels of Sup/Res.

List of abbreviations
Any currency can be abbreviated with its first letter:

1. U – USD, US Dollar
2. E – EUR, Euro
3. G – GBP, British Pound
4. C – CAD, Canadian Dollar
5. H – CHF, Swiss Franc, (because C is already used for Canadian Dollar)
6. A – AUD, Australian Dollar
7. N – NZD, New Zealand Dollar
8. J – JPY, Japanese Yen
9. M – MXN, Mexican Peso

Similarly any trading pair can be shortened to 2 letters. Examples:

1. EURUSD – EU
2. USDMXN – UM
3. CHFJPY – HJ

Support and Resistance levels:

1. S – Support
2. R – Resistance
3. SR – Support and Resistance (when referred to in general)
4. TL – Trend Line
5. Ch – Channel
6. PP – Pivot Point

Time frames

1. TF – Time Frame of the chart
2. MN – Monthly
3. W1 – Weekly
4. D1 – Daily
5. H4 – 4 hours
6. H1 – 1 hour

Commitment of Traders

1. COT – Commitment of Traders
2. NC – Non-Commercial

Phases
I see this thread going through a couple phases in course of its development

1. First of all we need to build a framework to see the market in a certain way. During this phase I am going to analyze all 28 major trading pairs on history and try to find explanation why certain moves started and ended the way they did. Here I am using the benefit of hindsight, purposely finding the ideal point of reversal first and then thinking how it was possible to anticipate it or when was the new trend confirmed inside of our analysis framework after the reversal.
   I expect this phase to continue for at least a month and there will be a lot of charts to analyze in detail.
2. Second phase is to identify certain rules of analysis that we found during the first phase and then start applying them to the current markets, by following all 28 trading pairs bar by bar on Weekly and Daily as they unfold.
3. The last phase is to identify entry points in the direction of the prevailing bias that we find while doing market analysis.

With all this in mind I want the reader to understand the purpose of the current analysis that will be posted during phase 1. There will be no trading signals to follow and any speculation about further price movement is irrelevant at this stage, as we are trying to polish the analysis framework by learning from history.

When we get to the second phase, the most important step of higher timeframe analysis is to filter out one side of the market. At any given point the trader can only do
3 things on the market: buy, sell or do nothing. The purpose of the first stage in my analysis is to filter out one of these possibilities, therefore simplifying the decision making process when a trade opportunity presents itself. Because you should always give yourself the freedom to do nothing on the market, we are looking for trading pairs where it is possible to filter out either buying or selling. That's it, as simple as that - the analysis is finished when we identified that the chances of the price going in one direction are higher than in the other.

Certainly, there are situations when buying or selling opportunities are present with similar chances of success (which is to say, 50/50) but I naturally prefer to avoid such markets and look for potential trades elsewhere.

Let's start with an article I wrote recently. I write, first of all, for myself. Any psychological issues I have in my trading I put on paper as questions and then try to answer. Such articles usually result from the answers.

Let's take a look at the 3 main parts of trading profession, the essential treats of character for any successful trader.

Being a businessman
Trading is first of all a business. It is about embracing the risk, taking the action and accepting the full responsibility for the actions we take.

When I read about trading online, I always see that trading is about being home, waking up whenever you want to, and taking a couple trades with an easy to follow trading system that you can conveniently buy on the same website for $99.99. Even better, the system can be fully automated, a miniature variant of money printing machine at the convenience of your home office! Sure, I get the fine print required by the government about how risky it is (you can find it in the beginning of this newsletter as well), but the big letters right here say clearly 90% success rate on any timeframe, any trading pair, any account size!

That was the general mental state I was in when starting to trade. However, trading turned out to be one of the most difficult paths one can take in life. I was lucky enough to find an online community of professional traders where I learned not only all the basic and advanced technical analysis but more importantly the right attitude to trading. The rules for all newbies were the same: not only had you pay the monthly fee to be allowed in, but every day you had to be there in the discussion from 8am GMT+3 (start of the European session) to 6pm (after the start of US session) and had to create pictures for every single post that pros make. Only by going through that, following them word to word, typing in their comments in the pictures, could you understand what trading is about.

Of course, it was strictly intra-day short term trading It is a little bit slower pace of action on higher timeframes. Either way, anyone expecting to have a relaxed time trading should seriously reconsider his goals.

Having said all that, it is not just hard work that make the trading difficult for most people. Being a businessman implies another important character trait the ability to accept full responsibility for ones life. Most people can never truly exchange the comfort of day job with an expected paycheck by the end of each month, employer provided benefits and a relative sense of stability for more freedom. Freedom of being self-employed implies the ability to make your own choices and decisions in life. It never implies freedom from responsibility. Only by embracing the risk, the unknown, being responsible for each moment in your life you can truly succeed as an entrepreneur.

Being a trader
What does it mean being a trader? If we had to define one core function a trader has to perform, what that would be?

Trading, like any other profession requires a particular set of skills. We teach economists, analysts, bankers, but I will argue that having all these skills, even at a very high level, does not guarantee any success in trading. In fact, I found that studying the market only made it more difficult for me to actually trade.

First of all, lets define what trading is NOT about at its very core.

Trading is not about analysis of the market. It is not about forecasting the price, knowing where it will go. Trading is also not about understanding the underlying economic reasons why the price moved where it did. Sure, all these things can and will help in trading and I am not denying the great value in this additional knowledge, but at its core these skills are not definitional of trading.

Lets take a look at an example. A musician, just like a trader, needs a certain set of skills to become successful. He can learn all he wants about the history of music, understand all different musical styles, become very knowledgeable in works of every major composer, learn all ins and outs about musical theory and harmony, etc. All these things are extremely important but in themselves they will only make a good historian of music, or (god forbid) a music critic.

What defines a musician, however, is first of all his ability to play, to perform. There are countless successful musicians, especially in modern popular music, that reached success with no knowledge of musical theory but simply by superb performance of their original or someone else's work. The technique, the ability to make the sounds pleasant to our ears is the core of any musician.

Coming back to trading, let's see if we can define a traders core skills in a similar fashion. Just like musician's final creative output is the sound he produces, the trader's final output is the money. There is nothing else a trader generates by the end of the day but a balance - negative or positive - in his account.

Musician's ability to produce sounds pleasant to our ears is defined by his technique - his ability to execute every single note in just the right way. Similarly a trader can produce money by his technique - his ability to execute every single trade at the right time in just the right way.

I accept that one can be a high level composer, writing music for the orchestra or solo performers, without having the ability to perform his work himself to a high standard. You can also be a good market analyst, forecasting the price with high precision. You can plan your perfect trades all day long, and still be unable to trade your plan.

So, at the core, being a trader means executing the trades, pulling the trigger with no hesitation and great consistency. They may be bad trades indeed, but I never said that trading is only about taking the trades I only shared my opinion that without that ability no one can be called a trader.

Being an analyst
This is where you plan your trades. We discussed trading the plan in the previous section, when in reality you have to plan the trades before you can trade them. However, I feel it is important to emphasize how much more crucial it is to execute the plan then to write it.

When I started my main goal was to analyze the market the best I can, try to forecast the price, predict every single move of the market. I read and learned everything I could find, starting with simple charting tools such as trend lines and channels, then trying every single indicator, hoping that I can find the one that works more often than it doesn't, exploring the Fibonacci set in great detail (going as far as reading his original work), getting stuck with Elliot Wave theory for at least 5 years and then finally programming the most complex automated trading strategies I could imagine, powered with desire to have my own money-printing machine in the office. Naturally, none of that worked.

It was a very vicious cycle indeed, something many traders get stuck in for many years. You find something that seems to work on the history, start using it life, fail with the first couple of trades and quit before too long, swearing never to come back to the markets again. However, as frustration wore down with time I was ready for another try, another great idea to make me rich overnight.

Many traders are lucky to end that cycle either by becoming totally hopeless or losing enough money to quit for good. I did not have such luck on my side. Being careful enough to follow money management rules and never risking more than 1% in a trade I was going in circles for more than 7 years. When I was ready to quit after the first 4, I started programming for other traders and that was fueling my desire to come back to the markets all the time, nonstop.

I never actually did badly, I had many good trades and was considered a good analyst. The fact that I did not get at the time was that being a good analyst, predicting the price and winning consistently in trading have very little in common.

Until very recently I never even considered that my problems could be in trading execution. Any time I would miss a good signal that I planned to take, I blamed my analytical abilities they are not good enough to provide the confidence to take the trades I plan. And so I searched for the next golden trading rule. When I took the trades that failed, guess what, I blamed my analytical abilities again. When I took the trades I never planned I once again reasoned that I do not have a trading system good enough to trust and not consider taking any trades that are not part of it. You see, our brain is extremely good at finding excuses.

Putting it all together
Just like any other profession or pursuit in life, trading is a journey. In this series of articles on trading mindset and psychology I am attempting to draw a map that we can rely. It is not going to be a perfect map that can change us from failure to consistent success overnight, to follow the map precisely we will need a key. That key is our understanding of ourselves our own beliefs, fears, expectations, the excuses our brain makes. Developing such deep understanding that is necessary to succeed goes well beyond the scope of any writing it is the pursuit of ones whole life.

Finally, the last thing to get us started is to post a sample analysis I do daily for multiple trading pairs. I write it in Word to keep everything organized, and unfortunately I do not have time to redo the formatting completely for the forum.

There are 2 ways I can post it: as 2 images (screenshots of Word page) or in one pdf page. Let me know what works better. I will try both ways the first time around.





I certainty do not pretend that my analysis is ideal, it is simply another point of view about the market. The market really doesn't care whether we think we are right or not - in the end it will go where it needs to. That is why I never forecast the price, I simply try to state clearly what has happened recently and happening right now, and from that I speculate what may happen next, placing a bet that may or may not work out.

I hope to improve the analysis methods and overall understanding through the work in this thread.

follow to learn

I think the analysis is readable when I post the pictures, so there is no need to attach a pdf. This way we can keep everything inside of the thread, without having to download anything.

I have updated the first post with a little bit more information.

Here is another trading pair overview from the previous week - GBPUSD.

The cross: EURGBP. Very interesting to compare price action and large positions together with EURUSD and GBPUSD, as we can see clear correlation between all three trading pairs.

Good job Anatoliy,

I look forward to the journey

Thanks Cakrajaya and Spyderman, good to have you around. Remember that our first goal is to build the framework of analysis from which we can operate during the later phases. Feel free to ask questions and provide critique concerning the current analysis. As we need to take a look at all 28 trading pairs, and then compare the correlation between them, there is still a long way to go.

Also let me know if you are having trouble setting up COT in your MT4. After the Meta COT project is installed, you need to put Absolute positions indicator into the same window 2 times: once for each currency. From that point in order to make it work you only need to download data from official COT website.

In any case, here is AUDUSD. This is a very interesting review, as it introduces an important concept: the largest traders do not move the market any way they want, sometimes they lose money big time and that is exactly what we are looking for. When you see huge volumes of actual traders trying to pushing the price one way, and yet it does not go, the tension starts building up. These traders not only let us know that they are very bullish/bearish for this currency, they also supported their opinion with real money. When the price is not able to go that way fundamentally, it is only held in place by this aggressive buying, which cannot go on forever. If the price reverses against these traders, they will be forced to bail out in huge losses, generating huge volumes on the opposite side (if they were buying, now they will have to sell). This will fuel the market and create a really strong trend that we can anticipate and then follow with price action.

Let's take a look at AUDNZD cross and next we will analyze NZDUSD.

Let me know if this analysis format is readable. I can upload pdf instead, as I did in post 3, but I think it is better if the analysis is visible right in the thread, without having to download anything.

The only problem I have with it on the thread is that you have to open both images in separate windows to read, then you have to go back and forth as you read the text on the 2nd image but look at the chart on the 1st. Would be nice to have the pdf too.

Yes, it makes sense - if I make an image with all 4 charts on one screen I will have to zoom out quite a bit and it will not be easy to read. I will add pdf as well; in the meantime I will see if I can come up with a better solution.

Major update in the first post
I added simple installation instructions with installation archive and data archive. It also includes the latest COT data files from now on.

---

Here are NZDUSD pictures and pdf.

Anatoliy,

Thanks so much for the indicators and explanations. Got it all loaded but seem to be missing the 2004-2014 data. Did I miss that in post 1?

I left computer uploading the data file, but the forum did not accept it, apparently the file being too big. I uploaded it here:
COT data 2004-2014

Updated the first post as well with correct download link.

Now starting to look into crosses between E, G, A and N.
Here is EURAUD.

Nice thread! I like your angle, "Commitment of Traders". How long you hold your trades, implied by the candle length in your charts, sparked my interest in a couple of directions others with a different trade hold than yours could appreciate your thread.

First, an average-held trade could benefit by adding how different symbols's charts immediately around news sometimes have the same pattern. While this would require a very short-term candle, the consequences could be played into this length of a trade hold.
Hanover has/had an indicator that compiles and thus correlates symbols for this purpose -- can't remember the name, and thus can't provide a link to it, at the moment.

In the shortest-held trades, into play is randomness: How one organizes found patterns relative to each other, rather than paying attention to the name and fit of some recognizable pattern ( a googled "candle patterns", etc.) My method does this angle. (Note: I only practice, no real (tho did now long ago).)

Overall, I'm not suggesting change for you, just offering appreciation. I immediately connected with your thread through the word "Psychology" in its title.

I'm also looking back at your posts and beginning to appreciate your indicators, how they work so well at that chart time.
Okay, I did. It makes sense that your method of trusting the biggest traders and thus a simple average of their judgements, can work as well or, due to its relative -- except for the specialized technicals/data -- better than my method or any "appreciation" I've suggested in this post.
So, thank you for such a great thread.

Thank you, I am glad you found this thread interesting. Concerning the length of trades, I think it is up to individual to decide and such long term analysis can be useful for almost any trader. To me personally, I am trying to hold the trades for the whole weekly trend, but at the same time I am making sure I take some profit as soon as possible and protect the trade.

Here is an example from February. I think this entry point is mentioned in my EURGBP overview that I posted earlier in the thread.



The initial premise was that the price will not have an easy time going down and will see more resistance as it did. The first profit was taken as soon as the price reached EMA, the next near the monthly pivot. The final trade was trailed to profit and allowed to go with the trend:


In rectangle another 0.19 were closed as it was not certain whether EUR or GBP will win over.

Note: I never show live trades, and this entry was taken on a demo in the process of testing this analysis framework. I should add that it was among many other trades that did not work nearly as well.

I hope to look more into trade entries and trade management in later phases of the thread's development.

I would add a little bit that I am trusting the psychological analysis of positions of the biggest traders. In other words, I think it is very unwise to blindly follow what they are doing, but through analysis we can see what state they are in and speculate what are they more likely to do next. There are countless examples when the best signal provided by large speculators is the fact that they are in heavy losses and did not bail out yet - AUDUSD analysis above is a great example.

Once again, I am glad you find the thread interesting. Psychology is extremely important in my opinion and I will be writing more on that topic.

Here is GBPAUD review.

EURNZD review. The more pairs I analyze in such detail, the more interesting elements I see that I was missing just a couple months ago. The most important part is to have an open mind and be ready to accept being wrong when new information is available.

Suscribed, nice job !

I know that there are several courses out there about trading, but I have not come across many talking about trading psychology/mindset. Therefore I was wondering if any one may have taken or knows something about a course I am planning to take about trading psychology/mindset.

I have come to realize that despite my technical ability, sometimes I tend to close trades early, or delay in closing ending up with low profits/larger losses respectively, so would any one recommend that I take the course at 2ndskiesforex.com, which is about trading mindset? Just seeking your opinion before I commit. Thank you.