We have come to the part that we all dreaded and were sick of in school – calculating.
Remember how much you hated it when it was time for a math lesson with all of the numbers and letter pushed together into one plate? I know I did. Well, here we are. With the need to create our own equation that is going to help us create our very own COT indicator.
And did you think that getting settled with the numbers and understanding what they mean is all there is?
Of course not!
By this time, you should have understood that every topic leads to the one even more difficult and important.
So. Remember – the numbers in the report are showing us how long large speculators have gone and how short the positions of commercials traders have been. And yes, the longer one of them have gone, the shorter the other ones are going to be.
But let’s get back to said equation. In order to create your indicator, you need to settle with two points: you need to decide how long a period you want to cover [here the more values you put into the index, the less sentiment extreme signals you are going to receive, but the more reliable they will be and vice versa].
And you also need to calculate the difference between the positions of large speculators and commercial traders for each week of trading period of your choosing.
And here is the equation: difference = net position of large speculators – net position of commercials.
As a result of the equation you are going to get a lot of numbers. Some of them are going to be negative, some are going to be positive. After you calculated all of them, you are going to have to rank them with 100 being the largest position and 0 being the smallest position.
From here on you have your own COT report indicator. And it is going to act just like RSI or stochastic: the closer the chart to one of the extremes – 0 or 100 – the more likely it is that we are going to see a reversal of the existing trend.
Not that hard, but not easy either.