Commitments of Traders
09/01/2006 12:00 am EST
This insightful new book by Floyd Upperman is not for the novice trader and is geared specifically to those trading the futures markets. Many are unfamiliar with the Commitment of Traders (COT) data that is published weekly by the Commodity Futures Trading Commission (CFTC). To understand this information, one must remember that the futures markets were originally developed first to allow commercial consumers to guard against rising prices in the future by locking in a price, and secondly to allow the commercial producers to guard against falling prices in the future. Both use the futures markets to hedge their exposure and to transfer risk to the speculators who provide the liquidity that allows the commercials to avoid costly price swings. The data also covers the relative short and long positions of the funds and large traders as well as those of the small speculators and small hedgers.
With his background as a statistician, Floyd has been able to determine when ?the dominant market participants [the commercials] are building statistically significant positions. The Individual Market Participation Approach (IMPA) is one of his unique approaches to trading that combines both fundamental and technical data. Four different criteria must be met to complete the requirements for an IMPA trade. Utilizing the COT data, he identifies those markets where the commercials are holding extreme positions and commodity funds and/or public traders are holding an equally extreme but opposing position. This analysis supplies him with a positive or negative direction. Before a trade is initiated his proprietary RSI and price structure analysis must confirm that a new trend is beginning. It should be noted that these—extremes—are determined by rigorous statistical analysis. Throughout the book Floyd gives the reader guidelines as to the discipline and money management rules that one must follow to be a consistently successful commodity trader. This includes the 50% rule and how to place and adjust stops. Since many of his charts are quite complex, a link to his website www.upperman.com is provided where the reader can view all of the charts from the book in color.
After discussing in detail how he is able to identify these extremes in the net-commercial position, Floyd shows how other methods, such as plunger patterns and seasonal influences, can be used to enhance or filter the IMPA trade setups. There is also an interesting chapter on swing trading that is quite different, and will provide any student of the market with lots of food for thought.
This is a book that every commodity trader should have but is also one that requires careful study and repeated reading before the concepts can be fully understood. There are also some examples of IMPA trades and an extensive Appendix that includes Back Testing Results on 38 markets. The examples are fascinating; I especially found interesting his analysis of COT data for the US equity market, showing the signal to buy in 1994 and the signal to sell in early 2000. There are also revealing examples in the futures markets of precious metals, interest rates and live hogs. I could go on, but I think I will just go back to reading.