Let’s have a few words about following groups of Commitments of Traders report - Speculators.
As the name suggests they are here to profiteer. They come to buy low and sell high unlike Producers who come to markets to hedge physical commodity exposure.
COT segregates Speculators into two groups – Managed Money and Other Speculators. Managed Money are hedge funds, this is the most agile and dangerous group of players. When Energy Agency released weekly Natural Gas report and you see huge volumes bought and sold within seconds – be sure this spike was caused by them. Managed Money move markets. They like to create noise on TV and other media telling everyone to buy oil or gold. This way they invite dumb money to join the game and lose. They do what Gordon Gecko did in famous movie Wall Street.
Other Speculators are no different. They are commodity trading advisors (CTAs), banks, family offices and others who do not fall in Managed Money category. There is very little difference between these two groups of speculators. In our COT model we do not differentiate between Managed Money and Other Speculators.
Should you follow Speculators? Yes, but… But only when you understand that they made a decision which way they are going – when markets are undecided Speculators buy this week and sell next week and as COT release is delayed by a few days, you will always be late if you try to mimic their pattern. Wait for their movement to become stable, ideally market should reach euphoria or depression zones (to be discussed in future articles) and only then jump in.
You need to have good understanding of commodity cycles so you can time your moves better. Let’s take wheat as an example. Main crop is harvested in August-September, until this moment there is uncertainty about crop numbers and one can expect rallies during February-July. During this time you should monitor COT for speculators buying. Do not expect rallies to last exactly from February to July every year though, that would be too simple. Or if you trade Natural Gas join speculators selling during January-March because this is the time when demand hits highest values and from there you can sell into spring months.
When markets reach zones of euphoria and depression we monitor COT carefully because Speculators cannot buy (sell) indefinitely. And once their action becomes too slow and volumes too thin then it is time to bet against the market and join new trend from early start.
Happy trading!
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