Commitment of Traders Plug-in
In this Track 'n Trade Pro trading training video, I want to continue our discussion of the psychology of the Commitment of Traders We're looking at the Lean Hogs July 2004 contract. You'll notice that what we're seeing is we're seeing a nice long narrow channel. This channel this sideways market has gone for about 6 months before this market started to accumulate.
Now, you and I as traders are looking for an opportunity to catch a long uptrend like this, it's difficult sometimes for us to know when that market is going to start. We'll sit there, and we'll use our technical indicators and of course technical indicators don't do a very good job in sideways markets. If we go through and turn on some of our indicators, you'll see that.
I'm going to turn this market back to about here. We know this market is going to take off, but if we were looking at this market ourselves and trying to decide when to get into this market for a long take off, we look at our indicators, we'll notice that each indicator kind of whipsaws us in and out of the market during narrow sideways channels.
There's our AD indicator, which is generally a very good indicator, it's a very strong indicator. It tells us when good markets start and when they end. But the problem is, just like every other indicator, they're not very good at telling us much in a sideways market.
Let's go and look at the CCI indicator. Now, there again, the CCI indicator is not a very help in telling us when a market is going to start and when it's going to take off or when it's going to retrace. We don't know from all of these arrows that we're receiving all these conflicting buy/sell signals.
CCI does pretty good, if you look it is helping us out a little bit here. It's giving us, this is a bottom, this little part here, it's starting to go up, and then it got up this high and then it went, oh, maybe this isn't the top- sell off, bottom- sell off, bottom- sell off. Then, buy, buy, buy, all the way down. Of course the reason that is, is because the CCI indicator is very good at picking tops and bottoms, but it doesn't know where the bottom is either; so it just keeps telling you this might be a bottom. Oh, no, maybe this is a bottom, no..maybe this is a bottom, oh...this is probably a bottom. Then, we start right back up, and says oh, this is the top. Oh, maybe this is the top. Oh, here's a top, then we come over, oh, there's another top. Okay, so we have a little bit of confusion with our indicators.
That's the reason we tell you, you know, never trust all of your money on an indicator. If you buy and sell every time an indicator tells you to, it's a very quick way to lose all of your money to the markets. It has to be a combination of all of these different tools.
Here's the DMI indicator, which is also generally a very good indicator, but in a sideways market, it's going to whipsaw you in and out too much.
Here's the Mac-D, again, one of my favorite indicators. But through a narrow sideways market it doesn't do too well. Here's the momentum again, a very good indicator, this is just proof that you know, indicators don't work that well in narrow sideways markets. This is a pretty good one here, it's helping us pick out, you know maybe if we got in here, maybe we got out here, we might have been able to pick up some money along the way.
This trade, this is the RSI, which is another one of my very favorites. We have our fast stochastics doing a pretty good job. We have our slow stochastics, again doing a very good job. The reason we call them slow stochastics, they don't give you quite as many whipsaws. You see, we have the buys, the sells, the buys, the sells.
Let's turn on the Commitment of Traders and see what we get here. Again, the Commitment of Traders is doing the same thing as everyone else. Except we're not getting these arrows based on price. We're only getting these arrows based on what the large commercial traders are doing.
The large commercial traders, they're following markets just like you and me. They're trying to decide when this market is going to go up and down. They're using their indicators, and their trading strategies and techniques to try and tell them when it's time to get into a market or when it's time to get out of a market.
The best thing to do is always remember: never buck the seasonal trend, and never buck the commercial market trend. If the commercials are all starting to accumulate contracts, like right in here, and you have an indicator that tells you for some reason to go short, don't do it. Because the big movers are all going to go long. If they're all going long, and they're going to start moving the market that direction, that's the way their going to make money.
You'll often times notice that the little green guys, of course, those are the small speculators. The small speculators are the ones that they always say, oh, 80% of all small speculators lose money. You'll notice often times that the small speculators, the little green arrows are often times pointing down during an uptrend, which means of course that they're on the wrong side of the market.
Let's look at this a little bit further. Now, lets advance this market through the trend. This is the Commitment of Traders, they came along, and they said, look, we're going to start dumping our contracts right here. Because they started dumping their contract, you'll see they started to dump right through here, and the market started to go down. It didn't go down very strongly, but that's still a pretty good little move from the Commitment of Traders point. That's about a $2,400.00 move in there, but of course, they didn't start accumulating over until this point here. If you would have started accumulating when they say to accumulate, that's about a $1,100.00 move. Which is still pretty good and actually this says to accumulate down here, so we're not being fair. So that's about a $300.00 move.
See, they're starting to know, and they realize that the market is going in a sideways market, through here. But then they start to accumulate. So if you just watch your indicators, watch your recurring price patterns, and watch what the large speculators are doing. Use them as a guide to help you know when to get into the market. Now, just because you get an arrow, as we learn in looking at charts in the past, doesn't mean that it's time for you to just jump in just because they're jumping in.
Watch for a narrow sideways channel, a recurring price pattern, a triangle, or some kind of a reason for you to get into the market; some kind of a trigger. Remember that we always need to have a trigger to get us into the market. Maybe this would be our trigger right in here.
Maybe we would grab ourselves a little narrow sideways channel tool, and we say, okay, the Commitment of Traders are starting to accumulate right here. I'm going to start accumulating, because they are. Maybe on a break above this little channel or something. Give yourself a trigger or a reason to get into the market beyond something beyond- oh, well, the Commitment of Traders are jumping in or all the large speculators are jumping in so I'm going to jump in too. Not a bad strategy, I'm just saying that you need to make sure that you have a reason to get in, because even this one here- once you're in the market sometimes the Commitment of Traders will get you out before- maybe there's a little bit of money left in the market. They're jumping out right here saying well, I think we're going to start jumping out of the market right here. What that means to you is maybe tighten up your stops. Pull your stops right up in between, behind an area of support and let the market maybe move a little bit more, and maybe you could have caught maybe a couple more hundred dollars out of this market. There's an extra $1,000.00 right there, out of that market. If you would have just not jumped out when they said to. But they are starting to liquidate their contracts through here, which is giving you an indication that the market is probably going to start dropping off here. Now we're looking
Now, we're looking at the Lean Hogs. This is a nice little channel right here, the Commitment of Traders is starting to, the large speculators are starting to dump their contracts. This market is going to go down right now. Pretty good guess, that this market, when it breaks that trendline, it's going to drop pretty hard. We could come in here, and look for a 50% retracement, and we can probably expect this market to come back down to 68.287.
That's how you use the Commitment of Traders. Use it as an indicator to help you with your other recurring price patterns, your retracement levels, and follow the big Commitment of Traders, don't be on the wrong side of the market like a lot of these smaller speculators are.