Mastering Market Confirmation: The Key to Winning Trades with COT Data

Summary

Jason Shapiro discusses the limitations of Commitment of Traders (COT) data, emphasizing that it is not perfect and can result in false signals. He compares COT data to price oscillators like RSI, explaining how market conditions can show oversold or overbought signals without immediately reversing. Shapiro shares his approach to managing these imperfections by waiting for market confirmation, such as a 'news failure,' and using defined stops to prevent significant losses. By combining these strategies, he aims to reduce the impact of false trades and improve risk-adjusted returns.

Takeaways

• 😀 COT data is a valuable tool but not perfect—it can provide insights, but not every trade based on it will succeed.
• 😀 Jason compares COT data to an oscillator like RSI, helping to gauge market sentiment, but it can give false signals before a real market turn occurs.
• 😀 Just because COT data indicates an oversold condition, it doesn't mean you should immediately act—waiting for market confirmation is key.
• 😀 Market confirmation comes from a 'news failure,' where negative news does not push the market lower, signaling a potential reversal.
• 😀 Jason's strategy involves waiting for a news failure before entering a trade, rather than acting on the COT data alone.
• 😀 If the market makes a new low after entering a trade based on COT data, it invalidates the trade and Jason stops out to limit losses.
• 😀 The importance of stops: having clear definitions of what constitutes a valid market move and when to stop out is critical for managing risk.
• 😀 By avoiding the temptation to chase trades, traders can avoid unnecessary losses and focus on high-quality setups.
• 😀 Risk management is crucial: avoiding losses by sticking to the process and waiting for proper confirmations leads to better long-term returns.
• 😀 Jason emphasizes that losing trades can be avoided by using COT data in conjunction with market confirmation rather than relying on it in isolation.
• 😀 The key to improving risk-adjusted returns is minimizing losses over time, and avoiding chasing trades without the proper confirmation helps achieve this.

Q & A

What is the main message Jason Shapiro is conveying in this video?

Jason emphasizes that the Commitment of Traders (COT) data, while useful, is not perfect. He explains how to handle the imperfections in the data and how he manages trades based on COT data by looking for market confirmation and using stops to limit risk.

How does Jason Shapiro use the COT data in his trading strategy?

Jason uses COT data as an oscillator to track market positioning. He focuses on the extremes—when speculators are either overly long or overly short—which can signal potential market reversals.

What does Jason mean by a 'news failure'?

A 'news failure' refers to a situation where the market reacts negatively to bad news but still closes higher. This is seen as a sign that the market is absorbing the bad news and could be turning upward.

Why does Jason wait for market confirmation before acting on the COT data?

Jason waits for market confirmation to avoid false signals. He requires a news failure—a day when the market moves contrary to negative news—as confirmation that the market is indeed bottoming and could be turning upward.

What is the significance of the news failure day in Jason’s strategy?

The news failure day marks what Jason considers the cycle low, a key point to measure his stop and entry. If the market continues to make new lows after a news failure, Jason stops out, as it indicates the market has not yet turned.

What does Jason do if a trade setup doesn’t work out as expected?

If a trade setup does not work, Jason stops out. He has a clear definition of what constitutes a valid market turn, and if that turn doesn’t happen, he exits the trade to minimize losses.

How does Jason handle false starts in the market?

Jason acknowledges that markets can remain oversold for a long time, leading to false starts. To manage this, he waits for proper market confirmation (like a news failure) and uses stops to protect himself from extended losses.

Why does Jason emphasize the importance of avoiding losses in trading?

Avoiding losses is crucial for improving risk-adjusted returns over time. Jason believes that avoiding bad trades (like those without proper confirmation) is just as important as identifying good ones.

What role do stops play in Jason's trading process?

Stops are essential for managing risk. If Jason’s market turn does not materialize and the market makes new lows, his stop ensures that he exits the position and avoids a larger loss.

What example does Jason give to demonstrate a failed trade setup?

Jason uses the example of bean oil, where the COT data suggested a buy, but without a news failure confirmation. The market rallied briefly but then made new lows, illustrating how not waiting for confirmation led to an avoided loss.