Time after time, we see that the large traders are the most bullish at a market high, the most bearish—with real money I might add—at market lows. It does not matter what market they work. They seem to always be heavy buyers of market highs and sellers of market lows. Indeed, one can only ask how this group became large traders and how they can continue in the game with such an apparently poor track record. You need to understand the dynamics of the marketplace to understand what is going on here. Remember how I told you that the large traders are, for the most part, commodity fund managers?
These fund managers, for the most part, trade in a particular style and it is that style, their way of doing business, that gives what appears to be very poor performance. I say that because the commodity fund managers are, for the most part, long-term trend followers. Additionally, the stronger the trend becomes the more positions trend followers will have in a market.
As the move begins, some of the smarter or more short-term trendoriented funds begin to see the up move in price, and thus buy corn.
Their entry price is the highest high of the last 20 days. They are correct, as corn continues rallying. Since the trend is up they will not sell their sell or exit comes from a Large Traders. They are in for the ride. About this time another group of managers who have a little slower or longer-term trend-following method become buyers and establish their longs.
Their computers have flashed a buy signal at the highest high of the last 40 days. So they step in and buy 1, contracts. Corn continues rallying, now hitting the highest high of the last 26 weeks, a place I know lots of funds will become buyers. So another group takes down another 1, contracts. Most funds are now long as there has not been a pullback that would shake any of them out of their positions.
Next comes the highest high of the last 52 weeks and a bunch of funds step up to the plate at this point. Again 1, more contracts are entered in the long side by the super-long-term trend followers. All the fund managers combined now have a total of 4, contracts to the long side. What happens next is not pretty.
The market starts to come down, taking out the lowest low of the last 20 days, where the first 1, lots are liquidated at a profit. Prices rally back to a new day high. So the first group gets back in, and again there are 4, longs and perhaps another 1, or more based on this last trend move. The bull reigns supreme as corn climbs a little and then begins to collapse. The FIFO corn guys who bought really early in the up move will use a similar trend exit point. So once the price falls below a day low, lots of them leave the party, before funds who take a longer-term view of trend analysis. They can make money at this when the advance has taken the price up so much that the day low leaves plenty of profits for them.
The same goes for the next entry-level guys, who get out with a profit. The fellows who bought at a week high will get out at a week low, so they stay long through the decline. For the sake of discussion a new week low is not hit, so they are still net long. See what happened? The stronger the trend was, the more buyers it attracted.
So at the end of a trend, there will be numerous funds and large traders long, who still make a profit as their exit point is above their entry point.
Trade Stocks and Commodities with the Insiders: Secrets of the COT Report [Book]
The large speculator is typically a large floor trader, a managed futures account, or a small hedge fund. In general, these types of traders are technically oriented trend followers. Why is this? The hedgers are the most important. They have access to the cash markets, which gives them a large advantage. They are buying and selling in cash markets every day and thus have a better sense of actual market prices.
Hedgers have superior information. When the net position of the large speculators is at an extreme, expect the market to move in the opposite direction of the net position of the large speculators. For instance, if the large speculators are net long— and the net position is at an extreme and prices have been moving up— expect the price of the commodity to correct down. The large traders can and do make money when they catch a trend move, but such strong trends are rare.
I estimate markets are in strong trend moves only about one-third of the time, and even then at some point the commercials come and take control. There is a greater chance that the commercials will be correct. The times we have to be careful are when there are very strong, tight uptrends or downtrends. It does not tell us when traders got in, only the number of contracts they are long and short.
Knowing that the more a market rallies the more longs will be added, it is only logical that close to the end of an uptrend the trend followers translate that to fund managers will have on their most bullish position. All we need to do is look to see if their net position increases when a new X week high is made or the net position decreases at an X week low.
Where is X? On the chart of cotton Figure 6. Notice how when the price rallies to that level the funds dramatically increase their buying, putting them net long a large amount as I have marked off with the vertical lines.
The other side of this coin is equally revealing. When prices drop to the week low channel line, the net position line dips a great deal, telling us the funds have now exited their longs and have increased their short position. This is particularly evident at the end of the first quarter of when prices touched the week low line and this was followed by the very low level in the large traders net position.
The data was clear: the funds used this as a time to sell. This is not unique to cotton; it is true of all markets the funds dabble in.
I Really Trade
From our study of the actual buying and selling of this group, I think it is fair to say they are heavily reliant on channels, moving averages, and such that use the week time period as their entry point. On this chart Figure 6. There is high correlation between new week highs and lows and what the managers of money do.
The only difference is that when the large traders index is above 80 we want to look for sells, and when it is below 20 we want to look for buys. In essence we want to do the opposite of what the large traders do. A few charts should illustrate the wisdom of this approach.
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In the six years shown here, there can be no doubt that the best buy times came when the large trader index was below 20, the best sells when above The next chart to look at is coffee Figure 6. We know this because the large trader index is above 80 at these points, time after time. The reverse is equally true; at the lows the index was under 20, telling us large traders were heavy sellers. I often post current examples on Larry Live at my website: www. There you will continue to see the importance of facing the large traders. Later on I will tie all three of these indexes together so you can see how the commercials, large traders, and small traders stack up against one another.
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But for now, I hope you have seen the light and gotten the message: that we want to do the opposite of the large traders when they are at an extreme. It is at their extremes that we can take action.
When the funds have committed all they have to one side or another, there is no one left to move the market any further in that direction. The funds can be right, but when they gang up they are most apt to be wrong, something we can take advantage of as private speculators. The next time someone tells you that the Big Boys have been big buyers, look to go short!
T he net effect of commercials, large traders, and small traders can be expressed in two ways. The first is what traders refer to as volume: how many contracts of a commodity traded for a day, week, month, or whatever time period one is studying. Since price cannot move without buying and selling volume, analysts have spent a great deal of time trying to learn how it fits into the equation.
The second way is open interest, discussed in the next chapter. How many times have I read or been told that advancing price on advancing volume is bullish, as is declining price on declining volume? Hundreds is my estimate. Just as often, I have read the opposite to be equally true; a rally in price on declining volume is bearish, and a decline in price on increasing volume even more so.
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Book after book on stocks and commodities have made these assertions, to the point that they are widely accepted as true. They sound logical, I guess, and the comments have been passed from one generation of trader to the next, by word of mouth, books, and now the web pages. None of the following patterns are tradable as such, but each pattern will help us better understand the supposed impact of price and volume.
The equity curves show the net profits for trading the patterns. The ideal equity curve, of course, would start at zero and smoothly and rapidly increase over time. The first clip Figure 7. Both price and volume are in uptrends. The equity chart of such a trading strategy does not appear to offer much hope, at least for the short-term trader.
The data suggests to me that a condition of advancing prices on advancing volume is not bullish.
tabtentfulsizzre.gq Here we have advancing price on declining volume, something the so-called experts of the business tell us is bearish.