Commodity Markets Lecture Notes

Disclaimer

• Information is for educational purposes, not actual trade advice.
• Treat discussed ideas as paper trades.

Overview

• Presenter: Experienced in commodity markets for over 20 years.
• Focus: How to find consistency in directional bias, support, and resistance in commodity trading.
• Context: June 2017 ICT mentorship; Commodity Trading Lesson 1.

Commitment of Traders (COT) Data

Importance of COT Report

• Source: Weekly report by CFTC (www.cftc.gov).
• Focus: Futures contracts in short format under CME (Chicago Mercantile Exchange).
• Example: Japanese Yen Futures Contract.
• Data Points: Commercial long and short positions.
  • Example: 143,450 contracts long, 76,426 contracts short.
  • Net Position: Long minus short positions. Positive = Net Long, Negative = Net Short.

Analyzing COT Data

• Commercial Section: Focus on long and short columns for commercial data.
• Website Resource: barchart.com for net trader's position line chart.
  • Lines: Red (commercials), Green (large speculators), Blue (small speculators).
  • Duration: At least one year’s worth of price action for tracking.

Historical Perspective and Methodology

• Mentorship: Learned from Larry Williams, focus on commercial information from COT data.
• Commodities and Currencies: Treated similarly; both influenced by global commerce.
• Example: Hershey's use of cocoa; similar factors apply to currency markets.
• Importance: Hedging strategies used by large corporate producers or banks.
• Strategy: Track hedging programs rather than just net positions.
• Visualization: Use net trader’s position line chart to see commercial hedging activity.

Commercial Hedging Programs

Example: Japanese Yen (Dec 2016 - June 2017)

• Timeframe: Six months net long position.
• Analysis: Distinguish between buy programs (above zero line) and sell programs (below zero line).
• Buy Program: Longevity and intensity of commercials' net long positions.
• Data Interpretation: Requires examining deeper behind the numbers.

Practical Application

• Breakdown: Divide data into segments to understand the commercial nature of trading activities.
  • Order Flow: Identify bullish or bearish trends through institutional order flow.
  • Order Blocks: Supported bullish order blocks in down candles.
• Larry Williams' Teaching: Found that simple long/short models are insufficient.
• Modern Technique: Blending six-month and twelve-month intervals for more refined trading signals.

Specifics on Analyzing Data

• Plotting: Example of Japanese Yen focus on changes in net positions within specific date ranges.
• Key Observations: Distinguish macro programs from hedging programs for precise trading activities.
• Challenges: Differentiating short-term hedging in long-term buy/sell programs.
• Tools: Use of historical data, excel plotting, or program indicators (like MT4) for precise visualization.
• Final Chart: Track price movements versus net trader’s position to find true hedging actions.

Advanced Insights

• Data Manipulation: Remove unnecessary speculator data for clear commercial insights.
• Training Eye: Over time, visually recognize trends without extensive analysis.
• Extremes and Ranges: Defining commercial ranges within given time intervals for better predictive insight.
• Commercial Hedging: Specific buy/sell programs and their relation to institutional order flow and PD arrays.
• Summarizing Insight: Understanding the precise mechanics behind commercial price actions enhances predictive accuracy.

Conclusion

• Application: Use both long-term programs and hedging insights for optimal trade conditions.
• Method: Blend order flow, PD arrays, and net trader's position data for maximum accuracy.
• Final Note: Recognize ongoing hedging within broader long-term trends to find the key market movements.