Why Few Correctly Hear the Signal the COTs Send
The basic reason 85% of investors lose money on a regular basis is that they confuse themselves with a minnow in a shoal trying to avoid a predator or a goose in a flock flying south for the winter. They want to be part of a herd so they are safe. Mathematically 51% of people investing in anything have to lose money because of friction in the trade consisting of the bid-ask spread and commissions. If you want to be part of the herd, you will just give your money away.
To truly understand the signals coming from the Commitment of Traders put out on most Fridays by the CFTC you need to rethink most of what you have been told because virtually no one looks at the COTs correctly.
Think of Las Vegas. You go out, walk into a casino and look at all of the people. There are two different sorts. You have the gamblers, the punters as it were, and you have the house. Everyone is one or the other.
Trading commodities is exactly the same. In the commercials you have producers and consumers of the commodity. The producers are natural sellers at high prices and the consumers are natural buyers at low prices. In markets other than the metals, the commercials are normally neutral, one side wants to sell high, the other part wants to buy low.
On the other side of the trade you find the speculators, they are the gamblers in Vegas. You must remember, commodities is a zero sum game, each contract has a buyer and a seller. If you buy a contract first, eventually you have to close the contract by selling it or you must take delivery. If you sell a contract first eventually you have to buy it or make delivery. There are no “naked shorts” in commodities, it’s not possible and when you hear the term, you know you are dealing with a flimflam artist or someone so ignorant of commodities that they don’t understand the rules.
The speculators are the gamblers in Las Vegas and in the commodity pits. They are most comfortable buying at tops and selling at bottoms. They are the herd that almost always loses because of their emotions and desire to be part of the group.
Writers talking about the actions of the commercials have it dead wrong most of the time. When you hear about how prices are going down because the commercials are covering shorts, you need to go back and think about a commodity future requiring both a purchase and a sale. If in fact the commercials were covering shorts, they couldn’t possibly be driving the price down because the way you cover a short is by a repurchase of that contract. If prices are going down, it’s not the commercials covering shorts by buying; it’s the speculators covering longs by selling.
And besides, commercials are exactly like the house in Vegas, they don’t ever make the trades. It’s the speculators making the trade; all the commercials do is cover the long position or the short position of the speculators.
For example if the house or commercials determined volume, how come the tables are empty when you walk into a casino in Vegas at ten in the morning? They have dealers there and if you wanted to gamble, you could. But for the most part, they sit around looking silly until the punters show up later in the afternoon when action picks up. The speculators determine when trading takes place, not the commercials.
Wise investors, those 15% who actually make money in commodity trading when speculators are buying with both hands and mumbling about how the commercials are going to be forced into another “Comex default” on a new record high volume, the wise investor does the opposite. There is no voodoo to it. Just figure out what the speculators are doing and when they are at either extreme of emotion, do the opposite.
If you want to make money, sell at tops and buy at bottoms. It’s easy to do, just watch the actions of the speculators and do the opposite. If you care to notice, Vegas will take bets on either side. They have the house advantage and always make money because they are really speculating on the stupidity of crowds. You can do exactly the same and I lay it out in great detail in "Nobody Knows Anything.”