The TSAGroup COT Strength Indicator

Most traders use the COT net positions or the COT Index exclusively for their evaluation of futures positions. After all, knowing if a group is more long or short should tell you what they're thinking, right? If the Commercials are net 5,000 long positions, the Non-Commercials are net 3,000 short positions, and the Small Traders are net 2,000 short positions, then obviously the commercials are the ones in control of the market. ...or so it would seem. But this isn't necessarily the case. The reason that the different groups are useful is that we attribute some value of "weight" to their positions.

The 'Commercials' actually grow or use the underlying commodity, so they must have insight to their future needs or their ability to produce. The "Non-Commercials" rely on being correct for their various funds or managed accounts to succeed, so they must have insight to all of the various market conditions, timing reports, and fundamental conditions necessary to evaluate future movement of a commodity. The "Small Trader" must have insight into... well, let's face it, the small trader doesn't typically have much insight at all... or do they?

Giving each group their "weight" is useful, but if only net positions are considered then we aren't really giving any weight to any group at all. Since all long positions are matched by short positions, technically no group has control - unless one of the groups knew something the others didn't.

Only knowing that the Commercials are net long by 5,000 contracts means that no weight is being given for all of the short contracts that the Commercials are holding. Why would this matter? Knowing the number of contracts that are being held on the long or short side shows us if the group really knows something or not. The fact of the Commercials being long 5,000 contracts means something significant if they are only holding 5,500 contracts total (long and short). This would show that approximately 90% of the commercials are bullish and are all agreeing on the future of their product or position. But if the Commercials are holding 500,000 contracts total, then being net long only 5000 contracts is less than a 2% bias of the whole group towards the long side. With only a 2% bias towards the long side, there really is no agreement by the Commercials as to what positions to take.

To continue the argument, assume that even though the Non-Commercials are net 3,000 to the short side, the total number of positions are also short. This would mean that 100% of the positions held by the Non-Commercials are short, holding no long positions at all. Another way of looking at it is that the Non-Commercials are in 100% agreement on the positions that they are taking.

What would cause an entire group to be in complete agreement (or mostly in agreement)? There isn't enough information here to know what information that they are trading on, only that they are trading (in agreement) on the information that they have. This is what is being looked for; a situation where an entire group is effectively in agreement in their positions where the other groups are not. This is what COT Strength is for.

With COT Strength, it becomes very apparent as to what percentage of any group is holding which positions. With this it can be seen what group is most likely in control or which has advantageous information of that particular commodity.

The COT Strength is calculated as follows:

(Long Positions/All Positions)*100

This will plot the COT Strength as a value from 0 to 100. The value shown is the percentage of long positions held. The opposite would be the percentage of short positions held. So, a value of 20 means that 20% of the positions held by that group are long positions, and therefore 80% of the positions held by that same group are short positions.

The representation using the COT data from the TSAGroup would be:

((Net Positions/All Positions)+1)*50

and as a MetaStock indicator, this would be:

((C/OI)+1)*50

This indicator would be applied to each group individually to return the COT Strength for any particular group. After creating them on each particular group, they can be dragged and dropped into the same inner window on a MetaStock chart and then have the scales merged.