Trade Stocks & Commodities with the Insiders: Secrets of the COT Report (Wiley Trading)

"Finally, an insider's take on what really goes on behind the scenes in commodity trading. Larry writes his view of trading, as only he knows it, from his twenty-five years of experience."
—James Altucher author of Trade Like a Hedge Fund

Successful trader Larry Williams reveals industry secrets that help investors and traders successfully invest and trade side-by-side with the largest commercial interests in the world. You'll be introduced to the COT (Commitment of Traders) report, the best resource for achieving trading success, learn exactly what the information it contains means, and plan for maximizing profits by acting on reported actions.

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All Customer Reviews
Average Customer Review:
3 of 3 people found the following review helpful:

Groundbreaking work, 2007-12-03
(i).Thesis / Book Purpose
"I heard Goldman's was selling bonds the other day.... ",
"General Mills has a massive long futures position..."
We have all heard stories like that, usually when the market has been coming off some impressive rally or decline. However most of the times as the market turned the opposite direction, such statements proved to be equally short lived.
Nevertheless is there really a way of knowing what the "Big Boys" are doing on a collective basis ?
Welcome to Larry William's "Trading Stocks & Futures with the Insiders", the first (and only) book ever written on the subject of analysing commercial trader positions using the Commitment of Traders (CoT) data provided by the CFTC. The book's sole purpose it to get you in investment alignment with the largest participants in each futures and option market. It is an alternate way of viewing the fundamentals by tracking the footprints of the largest market participants' view of each underlying market.

(i) Organizational Structure:
The organizational structure of the book is not that apparent at a first glance, but the chapters can be roughly rearranged and "pigeonholed" in four different thematic categories as follows:

1. The Market Participants from a CoT point of view
Chapters 1 & 3 are about the commercials, an intro to their motives, mistakes and what to look for.
A thorough description of the CoT report contents as provided by the CFTC is given in chapter 2.
This is probably a chapter for those with the intellectual curiosity to know how the CoT data is gathered in its final format. Chapters 5 & 6 describe the operations of the Small and Large Traders categories (from a CoT point of view) respectively.

2. CoT Analysis
Chapter 4 is the first attempt to "quantify" commercial activity through the CoT Index (first introduced by Curtis Arnold). Chapter 10 features how to view the commercials vs all the market alongside other accumulation / distribution activity. Larry then goes to construct some custom (price-based, non CoT) indicators and then uses them in conjunction with seasonality. During the last part of the chapter, the EMH is "attacked" with some simple systems / tests. Chapter 11 presents a synthetic CoT index, however the specifics are not disclosed. Chapter 13 features another version of the CoT index, examples of how to use a simple CoT system that combines CoT data with a trend-following filter. Additionally, another intermarket system for Gold using the US Dollar is combined with seasonality. Lastly chapter 15 shows an example of CoT analysis on the bond market.

3. Volume & Open Interest
In Chapters 7 - 9, Larry deals with one of the most misunderstood aspects of technical analysis. Properties of volume and open interest (OI). Larry exposes myths and explains how these interact and how they can be used in context of the strategy. In chapter 9 Larry expands in the topic of OI, by taking a more thorough view that provides insight into OI quality.

4. Issues general about Trading
Chapter 12 is about stop importance and geared towards the novice. Discussions on preframing, and mental preparation, a sample long term exit strategy, entry & exit strategy adjustments according to the nature of the trend, bad trading habits. Chapter 14 is aimed at highlighting the use and abuse of technical analysis and the ineffectiveness of tools such as Fibonacci, candlesticks, chart patterns and formations.

(ii) Audience & Style of writing:

The book is the first on the subject of commitment of traders data analysis. Thus the largest part of the book's audience is by and large "beginners". Either literally or professionals uninitiated to CoT analysis. Larry however has managed to accommodate both audiences, by keeping on one hand the strategies and style of writing geared towards the less quantitatively inclined beginners, but providing enough ideas / hints for the seasoned professionals to work upon and to expand research methodologies.

Since CoT data are weekly, and analysis is mainly geared towards big picture views, consequently the book is not recommended towards day-traders / short-term traders. Additionally among the medium/long term community, the ones with a contrarian slant will find themselves in line with the philosophy exposed. Although the material is primarily used by futures/option traders, stock investors may also be utilise CoT data either directly (through Larry's advisory service) or indirectly (focusing on sectors that exhibit a high degree of correlation to underlying commodities). So although CoT is not suited for individual stock picking, it could prove to be very useful for identifying sectors (which according to academic studies explain 60% of a stock's performance). Therefore criticisms that the Larry has not included much stock-specific analysis may be true, but fail to see past the obvious.
As far as style is concerned most of the work is aimed primarily towards discretionary (or quant-guided traders at best), not completely systematic ones. However there are examples of such attempts.

The book is easy to follow, non-technical and mostly narrative. Larry manages to keep reader interest by using analogies from life to trading (how fishing in Montana is similar to trading, p.80) the common aspects of driving and trading (p.123) and the common mentality shared by trapeze artists and trading (p.123). The "emotional" qualities of writing are apparent in the use of humour and wit.

(iii) Main Points / Bottom Line:

Trying to distil the author's words of wisdom conveyed in the book in a few points would be:

1. Markets carry an enormous amount of randomness, but are not totally unpredictable.
2. Focus on the "big picture" and the fundamentals.
3. A way to follow the fundamentals is through CoT analysis, and by focusing at the extreme readings of commercial activity in particular (among other CoT tool readings).
4. Technical Analysis on its own is not productive, thus it is advisable to follow the forces that "move" the charts. A lot of Technical Analysis tools are of little use.
5. CoT analysis is not a market timing tool. It is a "big picture" technique.
6. No methodology is perfect, and the same applies to CoT research. Thus best results are obtained if CoT analysis is used in conjunction with other tools, such as cycles, seasonality, technical triggers, etc.

(iv) Degree of analytical exposure :

After reading the book, one of the most obvious conclusions is that Larry is a stern master in CoT analysis and an authority in the field. A lot of the ideas he exposes are just an exhibition of how much work needs to done in this particular area of research.

All of the examples are simple in computational intensity (as the author is the first to admit), but serve as an "idea generation platform" to those that wish to look past the obvious. Those that are looking for "easy answers" (exact system rules) or "math intensive" illustrations, are missing the point that Larry makes.

The CoT data can be used in either standalone format (chapter 4), or as model components. The illustrations are simple but illustrative of the possibilities. A simple trend-following application for high probability setups (page 150- 153), CoT used in conjunction with intermarket analysis (p.154), seasonality (page 156), custom indicators, sentiment. Although the examples provided are simple in nature and not suitable for stand-alone use, they do provide a useful illustration of the effectiveness of this analysis technique and the importance of looking past purely price-based, trend-following methodologies.

The examples provided to make the aforementioned points are mostly chart based.
Quantification of the data is in the form of normalised indicators (such as the CoT index, in chapter 4), oscillators (to study open interest activity in chapter 8), trading systems / setups that provide threshold actionable overbought/oversold levels, ratio smoothings (chapter 13).

Hypothetical trade performance statistics are reported in the form of dollars gained on a per contract basis. Precise entry and exit rules are not provided since the main point is to highlight the magnitude of the trends that can be spawned by CoT "signals", rather than actual trades / positions. CoT analysis (as the author repeatedly states) is not a precise market timing tool.

However, although examples are drawn from all asset classes, it would be more beneficial to the reader if there was a more extensive market coverage, even in the form of an appendix providing visual / chart based evidence for strategies. Another omission, is that although the author does point out that the methodology is not perfect he does not provide in depth causation for commercial signal failure, how to identify and deal with it. These issues are dealt in his advisory service.

(v) Comparative Evaluation
Since the book is the first of its kind (solely devoted to CoT analysis) it is not possible to do a comparative evaluation, as it would not serve justice to authors that have devoted a few chapters on the issue.


(vi) Possibilities for development
It this writer's view that the there is considerable scope of further research for CoT analysis (several ideas already being in investigation progress), and applied as part of a Decision Support System or integrated into a more systematic structure (there are already some papers on the subject from the academic community). Like all pioneering manuscripts, this book sets the foundations and fundamentals tools upon which further research will be done. A fundamentally robust technique, which means that it is able to sustain market environment changes (regime shifts).


If you would like additional information,
please refer to the conversation/ interview I had with Larry
on the subject of Commitment of Traders Analysis and Trading

Alex Spiroglou



3 of 3 people found the following review helpful:

Thinking of swing trading?, 2007-08-31
This is a good book to understand the participants in the market and how they behave. The charts tended to be small and hazy which made it difficult to see each weeks information discretely. I would recommend this book to someone that is green to the market to illustrate the importance of trading with the trend and as importantly, with the largest participants in the market. Worth a read.


4 of 7 people found the following review helpful:

Review of Commitment of Traders Report, 2007-02-18
I am glad to consider Larry Williams as a friend, so it is was with great enjoyment that I read his recent book. One of the great pleasures and benefits of knowing the Specs is being able to meet and discuss market ideas with the best.

The commitments of traders report provides good additional information to speculators in the futures markets. Larry presents many good ideas for quantitative specs to test, and even hints at some of the many tricks he has up his sleeve, without giving away the family jewels. The book's use of charts is aimed at the less quantitatively inclined beginner, and while some of the chart-based reasoning suffers from chartism's typical retrospective bias, Larry does have a chapter on quantitative tests, although limited to win/loss ratios and amount of wins, and briefly discusses down days in S&P. However, any astute spec can test the many good ideas rigorously and develop his own more precise methods.

Ideas for new trades can come from any source, as the Specs have shown us, and new ideas are necessary to keep an edge in a competitive market. Rather than try to find entries base on comparing chartpoints and indicators which is non predictive, better to use the ideas and data to refine the entries. It is in this spirit that the book is helpful to a speculator. It's a fun an quick read, in Larry's breezy and folksy style.

In many ways the most basic and important call in the market is if it is going up or down. Seems so deceptively simple, but the paths it takes throw one off the track. Good information, just a bit more than the next guy, is what it takes to head in the right direction, and the COT report may give an edge.

I give the book 5 Stars.


2 of 3 people found the following review helpful:

Good Book, 2007-01-15
Larry gives good insight into COT report. It will open you your eyes, because you will know why the price change. With COT you will know what the big guys are doing and that is very important for trading.

There insn't much stuff for stock, almost all is dedicated for commodities...


1 of 3 people found the following review helpful:

trade stocks & commodities by larry williams, 2006-11-03
LARRY WILLIAMS IS A PROLIFIC,SUCCESSFUL, EXCELLENT TECHNICAL ANALYST AND TRADER. VERY FEW HAVE ACHIEVED HIS SUCCESS. THE BOOK IS NOT FOR BEGINNERS. HE GIVES A GOOD 3D ASPECT OF HOW TO VIEW THINGS IN THE MARKET WITH EMPHASIS ON OPTIONS.

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