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Using COT data to spot potential big moves

I’ve mentioned the Commitment of Traders data on a few occasions previously in terms of its usefulness for tracking the positions market participants are carrying in the futures market (see Commitment of Traders: A Weekly Report Worth Viewing). The action in the British Pound of late provides a pretty impressive example of how you could have seen ahead of time the prospects for a big reversal were you tracking the COT figures

Take a look at how short the big traders had gotten in BP futures.

BPCOT101909

Notice in particular the Bullish column under Large Speculators. See how as of October 13th that group was 88% short (100%-12%). That’s a massively lopsided market.  When a market is so imbalanced like that it sets up for some real volatility when things start going in the other direction. We’ve seen that this week in GBP/USD.

GBPUSD102209

GBP/USD rallied from about 1.5850 to almost 1.6650 in 7 trading days. That’s nearly 800 pips and a great deal of the action, especial the October 15th rocket ride, was the result of short stops being tripped. Basically, we saw a short squeeze in sterling. Had you been watching how short the big players were getting as per the COT figures you could have at least been alerted to the potential for something like this happening and strategized for it.

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