This is a prime example of where the COT was a heavy predictive indicator.

In the time before position 1 (click on spot image to display full size chart), the COT Strength shows that none of the three groups (The Commercials, the Non-Commercials, and the Small Traders) have really chosen sides, and the sideways market during that time is a result of that. At the point of position 1 (3 days after the change in the COT values, or the time that we receive the information), we see that the Non-Commercials have moved to an extreme, with 86% of them taking long positions. By the Open Interest for them, we see a small increase in total positions held. This is because most of the Non-Commercials with short positions have dropped them in favor of the long positions, as well as actually adding long positions. At this point, we see that the Non-Commercials have discovered something, though we don't know what that is, and are positioning themselves to take advantage of it.

Click image to enlarge (spot) 1024 x 768

Click image to enlarge (future) 1024 x 768

At position 2, the Non-Commercials have added more positions (as seen in the Open Interest) and are adding them to the long side. The Non-Commercials are about 90% unified in the same direction, which is a fairly rare occurrence. Also, the Commercials are starting to add to their shorts as to create a hedge position for themselves and they are now beginning to anticipate something as well. By the time that we received this information, nothing had happened yet and it can still be acted upon.

At position 3, a huge up move has taken place. The Non-Commercials have now added some additional short positions (as can be seen in the Open Interest in the oval section market as 5) in case the rally is over. The Commercials are doing the same thing in the other direction.

At position 4, the trend does continue and the shorts that the Non-Commercials had taken have been dropped, leaving about 90% of the Non-Commercials with long positions. They ultimately keep this up for a couple more months throughout the trend.

In the second chart (click on the future image to change to this chart), we see the same points identified, not in a futures chart, but in a Forex chart. The chart is almost an exact inversion of the futures chart, as the futures chart is purchasing the US Dollar vs. the Japanese Yen, and the Forex chart is purchasing the Japanese Yen vs. the US Dollar. The information works both ways, but the position that is taken is the opposite of the futures positions.

The interesting part of this is the amount of profit that was available with this situation. If traded on the futures market, the initial margin would have been approximately $2700, and assuming that an entry was taken at a late point at position 2, and an exit was taken at the first sign of panic (position 3), then a profit would have been made of 509 points, or $6362 per contract.

This same (but opposite) trade on the Forex would have resulted in 642 Pips, and at an average of $8.83 per pip, that results in a gain of $5668 per position. All of this in only three weeks time.

Even though this example is being treated as if the Commitments of Traders were generating a signal, it should be noted that the Commitments of Traders should not be used as a trading system itself, but instead as information to help determine what trades to take by recognizing the bias that large-scale traders are placing on the markets during a given period of time.