How to Make a COT Trading Indicator of Your Own

It's like having your own pony when you have your own COT indicator.

When it comes to spotting potential market reversals, the COT report can be extremely informative.

But there's a catch: we can't simply look at the absolute figures listed on the COT report and declare, “Aha, the market appears to have reached an extreme... With my easy winnings, I'll short and buy myself 10,000,000 pairs of socks.”

Because the net long and short positions are not entirely relevant, determining extremes can be challenging.

What was formerly considered an excessive level five years ago may no longer be such this year.

What are your plans for dealing with this issue？

You want to build an index to help you determine whether the markets are reaching extreme levels.

How to Make a Market-Extreme-Measurement Index

The following is a step-by-step guide to creating this index.

• Determine the length of time we wish to cover. The more values we put into the index, the fewer extreme sentiment signals we'll get, but it'll be more dependable. With fewer input values, you'll get more signals, but you'll also get more false positives.

• Calculate the weekly difference between major speculators' and commercial traders' positions.

This difference is calculated using the following formula:

Difference = Speculators Large net position - Commercials' net position

Keep in mind that if major speculators are substantially long, commercial traders must be extremely short.

As a result, the figure would be positive.

Large speculators, on the other hand, are likely to be excessively short, implying that commercial traders are likely to be extremely long. As a result, the figure would be negative.

A negative figure would arise as a result of this.

• Sort the findings from most negative to most positive in ascending order.

• Give the highest number a value of 100 and the smallest figure a value of 0.

We also have a COT indicator now!

This is quite similar to the RSI and Stochastic we talked about in previous classes.

We should be notified whenever fresh data entered into the index displays an extreme: 0 or 100, once we've assigned numbers to each of the calculated differences.

This would suggest that the gap between the two groups' positions is widening and that a reversal is on the way.

Remember, we want to know if the current trend will continue or if it will come to an end.

If the COT analysis discloses that the markets are at extreme levels, it will aid in the identification of those coveted peaks and bottoms.

If you're trading on the MT4 platform, you can find a link to the COT indicator in our COT data to indicator forum topic!