I’ve been working with the CFTC’s Commitment of Traders’ Data for many years and the most consistent results have typically been following in the commercial traders’ footpaths.
This is exactly what Larry Williams refers to when he talks about, “trading with the elephants.” Trading system design comes from finding a fundamental premise about the markets and testing it going forward. I am aware of the neural network argument that implies that the models they find are beyond our abilities to reason and in my case, anyway that’s probably true. However, in mining the Commitment of Traders data for years I have also found there are times when the small speculators can be just as wrong as the commercial traders are, correct.
Cotton Focus
Successful trading requires consistent application. This morning’s piece is about the retail trader being too quick to pick a bottom in the cotton futures market. The recent rally off the bottom in the cotton market was something we saw coming for the last month. We first wrote about it on August 5. We could see the commercial tune changing as the market consolidated below $.70 per pound. Well, the commercial traders have begun to hand their cheap purchases off to the retail traders who appear to be bottom hunting.
Here is the link to all of our Commitment of Traders Programs.
Trading Spot
We’ve seen this situation before and it creates a very tradable opportunity. Assuming the retail guys are early, we’re going to sell this rally using Friday’s high a protective stop point. We clearly view this as a short-term trading opportunity as we do feel the commercial traders are in fact putting a bottom in the cotton market. However, we see this market testing $.65-$.66 and we will offset the trade by Wednesday’s close. Typically, this strategy has been right about 60% of the time in this market using only the stop loss and the time based exits. Again, observable, repeatable correlations are the cornerstone of trading program development.
