Wednesday, 30 May 2007

Update: New COTs Setup Beat S&P 400 by 45%... With a Twist

My new Commitments of Traders trading setup for the S&P 400 Midcap beat the index by 45 percent. It had eight winning trades, no losers and a maximum intratrade drawdown of just 5 percent. Not bad! It's been in cash since Jan. 16, 2007.

The setup is based on combining the signals from two groups of traders in the COTs reports that gave the most profitable setups. The setup buys or sells only when the two signals concur and is otherwise in cash. (In fact, it was in cash 48 percent of the time since 1999 when the first signal was given.)

The first setup faded the large speculators when their net percentage-of-open-interest position hit a specific historic extreme. The second setup traded on the same side as the small traders.

That's correct. The same side. This is the opposite of the usual practice of fading - or trading opposite to - this group because of the popular assumption that these guys, like the large specs, are the "dumb money."

Well, surprise, surprise, the COTs never cease to amaze. Backtesting the data shows, once again, that common notions about the COTs are often more myth than fact. Like my best Dow Jones industrial average setup, I found it was actually quite profitable to trade the same side as the small traders on the S&P 400 Midcap.

See more details on the "Profit/Loss Results" page (click the link to the right).

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