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Market Sentiment
Neutral (Overbought)
Based on the latest 13 weeks of non-commercial positioning data. ℹ️

REX ZONE 3 INDEX (Non-Commercial)

13-Wk Max 16,886 3,410 9,280 1,530 14,132
13-Wk Min 1,890 252 -3,390 -1,832 978
13-Wk Avg 10,583 1,553 710 5 9,030
Report Date Long Short Change Long Change Short Net Position Rate of Change (ROC) ℹ️ Open Int.
May 13, 2025 10,823 311 -294 0 10,512 -2.72% 38,089
May 6, 2025 11,117 311 -3,390 -1,832 10,806 -12.60% 35,457
April 29, 2025 14,507 2,143 -1,333 373 12,364 -12.13% 47,637
April 22, 2025 15,840 1,770 -62 0 14,070 -0.44% 46,416
April 15, 2025 15,902 1,770 736 0 14,132 5.49% 44,438
April 8, 2025 15,166 1,770 -1,240 -1,640 13,396 3.08% 43,118
April 1, 2025 16,406 3,410 -480 90 12,996 -4.20% 54,247
March 25, 2025 16,886 3,320 4,654 1,530 13,566 29.92% 53,947
March 18, 2025 12,232 1,790 9,280 240 10,442 644.79% 46,783
March 11, 2025 2,952 1,550 1,062 638 1,402 43.35% 31,543
March 4, 2025 1,890 912 0 31 978 -3.07% 35,405
February 25, 2025 1,890 881 -75 629 1,009 -41.10% 35,343
February 18, 2025 1,965 252 369 0 1,713 27.46% 27,859

Net Position (13 Weeks) - Non-Commercial

Change in Long and Short Positions (13 Weeks) - Non-Commercial

COT Interpretation for NATURAL GAS

Comprehensive Guide to COT Reports for Commodity Natural Resources Markets

1. Introduction to COT Reports

What are COT Reports?

The Commitments of Traders (COT) reports are weekly publications released by the U.S. Commodity Futures Trading Commission (CFTC) that show the positions of different types of traders in U.S. futures markets, including natural resources commodities such as oil, natural gas, gold, silver, and agricultural products.

Historical Context

COT reports have been published since the 1920s, but the modern format began in 1962. Over the decades, the reports have evolved to provide more detailed information about market participants and their positions.

Importance for Natural Resource Investors

COT reports are particularly valuable for natural resource investors and traders because they:

  • Provide transparency into who holds positions in commodity markets
  • Help identify potential price trends based on positioning changes
  • Show how different market participants are reacting to fundamental developments
  • Serve as a sentiment indicator for commodity markets

Publication Schedule

COT reports are released every Friday at 3:30 p.m. Eastern Time, showing positions as of the preceding Tuesday. During weeks with federal holidays, the release may be delayed until Monday.

2. Understanding COT Report Structure

Types of COT Reports

The CFTC publishes several types of reports:

  1. Legacy COT Report: The original format classifying traders as Commercial, Non-Commercial, and Non-Reportable.
  2. Disaggregated COT Report: Offers more detailed breakdowns, separating commercials into producers/merchants and swap dealers, and non-commercials into managed money and other reportables.
  3. Supplemental COT Report: Focuses on 13 select agricultural commodities with additional index trader classifications.
  4. Traders in Financial Futures (TFF): Covers financial futures markets.

For natural resource investors, the Disaggregated COT Report generally provides the most useful information.

Data Elements in COT Reports

Each report contains:

  • Open Interest: Total number of outstanding contracts for each commodity
  • Long and Short Positions: Broken down by trader category
  • Spreading: Positions held by traders who are both long and short in different contract months
  • Changes: Net changes from the previous reporting period
  • Percentages: Proportion of open interest held by each trader group
  • Number of Traders: Count of traders in each category

3. Trader Classifications

Legacy Report Classifications

  1. Commercial Traders ("Hedgers"):
    • Primary business involves the physical commodity
    • Use futures to hedge price risk
    • Include producers, processors, and merchants
    • Example: Oil companies hedging future production
  2. Non-Commercial Traders ("Speculators"):
    • Do not have business interests in the physical commodity
    • Trade for investment or speculative purposes
    • Include hedge funds, CTAs, and individual traders
    • Example: Hedge funds taking positions based on oil price forecasts
  3. Non-Reportable Positions ("Small Traders"):
    • Positions too small to meet reporting thresholds
    • Typically represent retail traders and smaller entities
    • Considered "noise traders" by some analysts

Disaggregated Report Classifications

  1. Producer/Merchant/Processor/User:
    • Entities that produce, process, pack, or handle the physical commodity
    • Use futures markets primarily for hedging
    • Example: Gold miners, oil producers, refineries
  2. Swap Dealers:
    • Entities dealing primarily in swaps for commodities
    • Hedging swap exposures with futures contracts
    • Often represent positions of institutional investors
  3. Money Managers:
    • Professional traders managing client assets
    • Include CPOs, CTAs, hedge funds
    • Primarily speculative motives
    • Often trend followers or momentum traders
  4. Other Reportables:
    • Reportable traders not in above categories
    • Example: Trading companies without physical operations
  5. Non-Reportable Positions:
    • Same as in the Legacy report
    • Small positions held by retail traders

Significance of Each Classification

Understanding the motivations and behaviors of each trader category helps interpret their position changes:

  • Producers/Merchants: React to supply/demand fundamentals and often trade counter-trend
  • Swap Dealers: Often reflect institutional flows and longer-term structural positions
  • Money Managers: Tend to be trend followers and can amplify price movements
  • Non-Reportables: Sometimes used as a contrarian indicator (small traders often wrong at extremes)

4. Key Natural Resource Commodities

Energy Commodities

  1. Crude Oil (WTI and Brent)
    • Reporting codes: CL (NYMEX), CB (ICE)
    • Key considerations: Seasonal patterns, refinery demand, geopolitical factors
    • Notable COT patterns: Producer hedging often increases after price rallies
  2. Natural Gas
    • Reporting code: NG (NYMEX)
    • Key considerations: Extreme seasonality, weather sensitivity, storage reports
    • Notable COT patterns: Commercials often build hedges before winter season
  3. Heating Oil and Gasoline
    • Reporting codes: HO, RB (NYMEX)
    • Key considerations: Seasonal demand patterns, refinery throughput
    • Notable COT patterns: Refiners adjust hedge positions around maintenance periods

Precious Metals

  1. Gold
    • Reporting code: GC (COMEX)
    • Key considerations: Inflation expectations, currency movements, central bank buying
    • Notable COT patterns: Commercial shorts often peak during price rallies
  2. Silver
    • Reporting code: SI (COMEX)
    • Key considerations: Industrial vs. investment demand, gold ratio
    • Notable COT patterns: More volatile positioning than gold, managed money swings
  3. Platinum and Palladium
    • Reporting codes: PL, PA (NYMEX)
    • Key considerations: Auto catalyst demand, supply constraints
    • Notable COT patterns: Smaller markets with potentially more concentrated positions

Base Metals

  1. Copper
    • Reporting code: HG (COMEX)
    • Key considerations: Global economic growth indicator, construction demand
    • Notable COT patterns: Producer hedging often increases during supply surpluses
  2. Aluminum, Nickel, Zinc (COMEX/LME)
    • Note: CFTC reports cover U.S. exchanges only
    • Key considerations: Manufacturing demand, energy costs for production
    • Notable COT patterns: Limited compared to LME positioning data

Agricultural Resources

  1. Lumber
    • Reporting code: LB (CME)
    • Key considerations: Housing starts, construction activity
    • Notable COT patterns: Producer hedging increases during price spikes
  2. Cotton
    • Reporting code: CT (ICE)
    • Key considerations: Global textile demand, seasonal growing patterns
    • Notable COT patterns: Merchant hedging follows harvest cycles

5. Reading and Interpreting COT Data

Key Metrics to Monitor

  1. Net Positions
    • Definition: Long positions minus short positions for each trader category
    • Calculation: Net Position = Long Positions - Short Positions
    • Significance: Shows overall directional bias of each group
  2. Position Changes
    • Definition: Week-over-week changes in positions
    • Calculation: Current Net Position - Previous Net Position
    • Significance: Identifies new money flows and sentiment shifts
  3. Concentration Ratios
    • Definition: Percentage of open interest held by largest traders
    • Significance: Indicates potential market dominance or vulnerability
  4. Commercial/Non-Commercial Ratio
    • Definition: Ratio of commercial to non-commercial positions
    • Calculation: Commercial Net Position / Non-Commercial Net Position
    • Significance: Highlights potential divergence between hedgers and speculators
  5. Historical Percentiles
    • Definition: Current positions compared to historical ranges
    • Calculation: Typically 1-3 year lookback periods
    • Significance: Identifies extreme positioning relative to history

Basic Interpretation Approaches

  1. Trend Following with Managed Money
    • Premise: Follow the trend of managed money positions
    • Implementation: Go long when managed money increases net long positions
    • Rationale: Managed money often drives momentum in commodity markets
  2. Commercial Hedging Analysis
    • Premise: Commercials are "smart money" with fundamental insight
    • Implementation: Look for divergences between price and commercial positioning
    • Rationale: Commercials often take counter-trend positions at market extremes
  3. Extreme Positioning Identification
    • Premise: Extreme positions often precede market reversals
    • Implementation: Identify when any group reaches historical extremes (90th+ percentile)
    • Rationale: Crowded trades must eventually unwind
  4. Divergence Analysis
    • Premise: Divergences between trader groups signal potential turning points
    • Implementation: Watch when commercials and managed money move in opposite directions
    • Rationale: Opposing forces creating potential market friction

Visual Analysis Examples

Typical patterns to watch for:

  1. Bull Market Setup:
    • Managed money net long positions increasing
    • Commercial short positions increasing (hedging against higher prices)
    • Price making higher highs and higher lows
  2. Bear Market Setup:
    • Managed money net short positions increasing
    • Commercial long positions increasing (hedging against lower prices)
    • Price making lower highs and lower lows
  3. Potential Reversal Pattern:
    • Price making new highs/lows
    • Position extremes across multiple trader categories
    • Changes in positioning not confirming price moves (divergence)

6. Using COT Reports in Trading Strategies

Fundamental Integration Strategies

  1. Supply/Demand Confirmation
    • Approach: Use COT data to confirm fundamental analysis
    • Implementation: Check if commercials' positions align with known supply/demand changes
    • Example: Increasing commercial shorts in natural gas despite falling inventories could signal hidden supply
  2. Commercial Hedging Cycle Analysis
    • Approach: Track seasonal hedging patterns of producers
    • Implementation: Create yearly overlay charts of producer positions
    • Example: Oil producers historically increase hedging in Q2, potentially pressuring prices
  3. Index Roll Impact Assessment
    • Approach: Monitor position changes during index fund roll periods
    • Implementation: Track swap dealer positions before/after rolls
    • Example: Energy contracts often see price pressure during standard roll periods

Technical Integration Strategies

  1. COT Confirmation of Technical Patterns
    • Approach: Use COT data to validate chart patterns
    • Implementation: Confirm breakouts with appropriate positioning changes
    • Example: Gold breakout with increasing managed money longs has higher probability
  2. COT-Based Support/Resistance Levels
    • Approach: Identify price levels where significant position changes occurred
    • Implementation: Mark price points of major position accumulation
    • Example: Price levels where commercials accumulated large positions often act as support
  3. Sentiment Extremes as Contrarian Signals
    • Approach: Use extreme positioning as contrarian indicators
    • Implementation: Enter counter-trend when positions reach historical extremes (90th+ percentile)
    • Example: Enter long gold when managed money short positioning reaches 95th percentile historically

Market-Specific Strategies

  1. Energy Market Strategies
    • Crude Oil: Monitor producer hedging relative to current term structure
    • Natural Gas: Analyze commercial positioning ahead of storage injection/withdrawal seasons
    • Refined Products: Track seasonal changes in dealer/refiner positioning
  2. Precious Metals Strategies
    • Gold: Monitor swap dealer positioning as proxy for institutional sentiment
    • Silver: Watch commercial/managed money ratio for potential squeeze setups
    • PGMs: Analyze producer hedging for supply insights
  3. Base Metals Strategies
    • Copper: Track managed money positioning relative to global growth metrics
    • Aluminum/Nickel: Monitor producer hedging for production cost signals

Strategy Implementation Framework

  1. Data Collection and Processing
    • Download weekly COT data from CFTC website
    • Calculate derived metrics (net positions, changes, ratios)
    • Normalize data using Z-scores or percentile ranks
  2. Signal Generation
    • Define position thresholds for each trader category
    • Establish change-rate triggers
    • Create composite indicators combining multiple COT signals
  3. Trade Setup
    • Entry rules based on COT signals
    • Position sizing based on signal strength
    • Risk management parameters
  4. Performance Tracking
    • Track hit rate of COT-based signals
    • Monitor lead/lag relationship between positions and price
    • Regularly recalibrate thresholds based on performance

7. Advanced COT Analysis Techniques

Statistical Analysis Methods

  1. Z-Score Analysis
    • Definition: Standardized measure of position extremes
    • Calculation: Z-score = (Current Net Position - Average Net Position) / Standard Deviation
    • Application: Identify positions that are statistically extreme
    • Example: Gold commercials with Z-score below -2.0 often mark potential bottoms
  2. Percentile Ranking
    • Definition: Position ranking relative to historical range
    • Calculation: Current position's percentile within 1-3 year history
    • Application: More robust than Z-scores for non-normal distributions
    • Example: Natural gas managed money in 90th+ percentile often precedes price reversals
  3. Rate-of-Change Analysis
    • Definition: Speed of position changes rather than absolute levels
    • Calculation: Weekly RoC = (Current Position - Previous Position) / Previous Position
    • Application: Identify unusual accumulation or liquidation
    • Example: Crude oil swap dealers increasing positions by >10% in a week often signals institutional flows

Multi-Market Analysis

  1. Intermarket COT Correlations
    • Approach: Analyze relationships between related commodity positions
    • Implementation: Create correlation matrices of trader positions across markets
    • Example: Gold/silver commercial positioning correlation breakdown can signal sector rotation
  2. Currency Impact Assessment
    • Approach: Analyze COT data in currency futures alongside commodities
    • Implementation: Track correlations between USD positioning and commodity positioning
    • Example: Extreme USD short positioning often coincides with commodity long positioning
  3. Cross-Asset Confirmation
    • Approach: Verify commodity COT signals with related equity or bond positioning
    • Implementation: Compare energy COT data with energy equity positioning
    • Example: Divergence between oil futures positioning and energy equity positioning can signal sector disconnects

Machine Learning Applications

  1. Pattern Recognition Models
    • Approach: Train models to identify historical COT patterns preceding price moves
    • Implementation: Use classification algorithms to categorize current positioning
    • Example: Random forest models predicting 4-week price direction based on COT features
  2. Clustering Analysis
    • Approach: Group historical COT data to identify common positioning regimes
    • Implementation: K-means clustering of multi-dimensional COT data
    • Example: Identifying whether current gold positioning resembles bull or bear market regimes
  3. Predictive Modeling
    • Approach: Create forecasting models for future price movements
    • Implementation: Regression models using COT variables as features
    • Example: LSTM networks predicting natural gas price volatility from COT positioning trends

Advanced Visualization Techniques

  1. COT Heat Maps
    • Description: Color-coded visualization of position extremes across markets
    • Application: Quickly identify markets with extreme positioning
    • Example: Heat map showing all commodity markets with positioning in 90th+ percentile
  2. Positioning Clock
    • Description: Circular visualization showing position cycle status
    • Application: Track position cycles within commodities
    • Example: Natural gas positioning clock showing seasonal accumulation patterns
  3. 3D Surface Charts
    • Description: Three-dimensional view of positions, price, and time
    • Application: Identify complex patterns not visible in 2D
    • Example: Surface chart showing commercial crude oil hedger response to price changes over time

8. Limitations and Considerations

Reporting Limitations

  1. Timing Delays
    • Issue: Data reflects positions as of Tuesday, released Friday
    • Impact: Significant market moves can occur between reporting and release
    • Mitigation: Combine with real-time market indicators
  2. Classification Ambiguities
    • Issue: Some traders could fit in multiple categories
    • Impact: Classification may not perfectly reflect true market structure
    • Mitigation: Focus on trends rather than absolute values
  3. Threshold Limitations
    • Issue: Only positions above reporting thresholds are included
    • Impact: Incomplete picture of market, especially for smaller commodities
    • Mitigation: Consider non-reportable positions as context

Interpretational Challenges

  1. Correlation vs. Causation
    • Issue: Position changes may reflect rather than cause price moves
    • Impact: Following positioning blindly can lead to false signals
    • Mitigation: Use COT as confirmation rather than primary signal
  2. Structural Market Changes
    • Issue: Market participant behavior evolves over time
    • Impact: Historical relationships may break down
    • Mitigation: Use adaptive lookback periods and recalibrate regularly
  3. Options Positions Not Included
    • Issue: Standard COT reports exclude options positions
    • Impact: Incomplete view of market exposure, especially for hedgers
    • Mitigation: Consider using COT-CIT Supplemental reports for context
  4. Exchange-Specific Coverage
    • Issue: Reports cover only U.S. exchanges
    • Impact: Incomplete picture for globally traded commodities
    • Mitigation: Consider parallel data from other exchanges where available

Common Misinterpretations

  1. Assuming Commercials Are Always Right
    • Misconception: Commercial positions always lead price
    • Reality: Commercials can be wrong on timing and magnitude
    • Better approach: Look for confirmation across multiple signals
  2. Ignoring Position Size Context
    • Misconception: Absolute position changes are what matter
    • Reality: Position changes relative to open interest provide better context
    • Better approach: Normalize position changes by total open interest
  3. Over-Relying on Historical Patterns
    • Misconception: Historical extremes will always work the same way
    • Reality: Market regimes change, affecting positioning impact
    • Better approach: Adjust expectations based on current volatility regime
  4. Neglecting Fundamental Context
    • Misconception: COT data is sufficient standalone
    • Reality: Positioning often responds to fundamental catalysts
    • Better approach: Integrate COT analysis with supply/demand factors

Integration into Trading Workflow

  1. Weekly Analysis Routine
    • Friday: Review new COT data upon release
    • Weekend: Comprehensive analysis and strategy adjustments
    • Monday: Implement new positions based on findings
  2. Framework for Position Decisions
    • Primary signal: Identify extremes in relevant trader categories
    • Confirmation: Check for divergences with price action
    • Context: Consider fundamental backdrop
    • Execution: Define entry, target, and stop parameters
  3. Documentation Process
    • Track all COT-based signals in trading journal
    • Record hit/miss rate and profitability
    • Note market conditions where signals work best/worst
  4. Continuous Improvement
    • Regular backtest of signal performance
    • Adjustment of thresholds based on market conditions
    • Integration of new data sources as available

Case Studies: Practical Applications

  1. Natural Gas Winter Strategy
    • Setup: Monitor commercial positioning ahead of withdrawal season
    • Signal: Commercial net long position > 70th percentile
    • Implementation: Long exposure with technical price confirmation
    • Historical performance: Positive expectancy during 2015-2023 period
  2. Gold Price Reversal Strategy
    • Setup: Watch for extreme managed money positioning
    • Signal: Managed money net short position > 85th percentile historically
    • Implementation: Contrarian long position with tiered entry
    • Risk management: Stop loss at recent swing point
  3. Crude Oil Price Collapse Warning System
    • Setup: Monitor producer hedging acceleration
    • Signal: Producer short positions increasing by >10% over 4 weeks
    • Implementation: Reduce long exposure or implement hedging strategies
    • Application: Successfully flagged risk periods in 2014, 2018, and 2022

By utilizing these resources and implementing the strategies outlined in this guide, natural resource investors and traders can gain valuable insights from COT data to enhance their market analysis and decision-making processes.

Market Neutral (Overbought)
Based on the latest 13 weeks of non-commercial positioning data.
📊 COT Sentiment Analysis Guide

This guide helps traders understand how to interpret Commitments of Traders (COT) reports to generate potential Buy, Sell, or Neutral signals using market positioning data.

🧠 How It Works
  • Recent Trend Detection: Tracks net position and rate of change (ROC) over the last 13 weeks.
  • Overbought/Oversold Check: Compares current net positions to a 1-year range using percentiles.
  • Strength Confirmation: Validates if long or short positions are dominant enough for a signal.
✅ Signal Criteria
Condition Signal
Net ↑ for 13+ weeks AND ROC ↑ for 13+ weeks AND strong long dominance Buy
Net ↓ for 13+ weeks AND ROC ↓ for 13+ weeks AND strong short dominance Sell
Net in top 20% of 1-year range AND net uptrend ≥ 3 Neutral (Overbought)
Net in bottom 20% of 1-year range AND net downtrend ≥ 3 Neutral (Oversold)
None of the above conditions met Neutral
🧭 Trader Tips
  • Trend traders: Follow Buy/Sell signals when all trend and strength conditions align.
  • Contrarian traders: Use Neutral (Overbought/Oversold) flags to anticipate reversals.
  • Swing traders: Use sentiment as a filter to increase trade confidence.
Example:
Net positions rising, strong long dominance, in top 20% of historical range.
Result: Neutral (Overbought) — uptrend may be too crowded.
  • COT data is delayed (released on Friday, based on Tuesday's positions) - it's not real-time.
  • Combine with price action, FVG, liquidity, or technical indicators for best results.
  • Use percentile filters to avoid buying at extreme highs or selling at extreme lows.

Okay, let's craft a COT-based trading strategy for Natural Gas on the REX Zone 3 Index, specifically tailored for retail traders and market investors using the CFTC Commitment of Traders (COT) report.

Disclaimer: Trading involves risk. This strategy is for informational purposes only and does not guarantee profits. Always conduct thorough due diligence and consult with a financial advisor before making investment decisions. Past performance is not indicative of future results.

I. Understanding the REX Zone 3 Index & COT Report

  • REX Zone 3 Index: This index tracks the price of natural gas delivered to the REX (Rockies Express Pipeline) Zone 3 area. This is a crucial hub for gas flowing from the Rocky Mountains to the Midwest and East. Understanding weather patterns in this region and pipeline capacity can heavily influence prices.
  • ICE Futures Energy Division: This is the exchange where the REX Zone 3 Natural Gas futures contracts are traded.
  • Contract Size (2500 MMBtus): A single contract represents 2,500 million British thermal units of natural gas. This is important for calculating position sizing and potential profit/loss.
  • CFTC Commitment of Traders (COT) Report: This report, released weekly by the Commodity Futures Trading Commission (CFTC), provides a breakdown of open interest (outstanding contracts) held by different categories of traders:
    • Commercials (Hedgers): These are entities that use the futures market to hedge their underlying physical commodity positions (e.g., producers, consumers, utilities). They are primarily driven by business needs, not speculation.
    • Non-Commercials (Speculators): These are large speculators, like hedge funds and commodity trading advisors (CTAs), who trade to profit from price movements.
    • Non-Reportable Positions (Retail): Positions too small to be reported.
  • Lagging Nature: The COT report is published with a delay of several days. So, while useful, it's not real-time.

II. Core Principles of the Strategy

This strategy focuses on identifying imbalances in the market by analyzing the behavior of Commercials and Non-Commercials in the COT report, combined with technical analysis and fundamental factors.

III. Key COT Data Points to Track

  1. Net Positions: The difference between longs and shorts for each group (Commercials and Non-Commercials). Pay close attention to the change in these net positions week-over-week.
  2. Commercial Hedgers: These traders are often seen as having the best insight into the supply and demand dynamics of the commodity. Their actions can be seen as a leading indicator of future price movements.
  3. Non-Commercial Speculators: Understanding their position is also important, as a large net long or short position can signify either an overbought or oversold condition.

IV. Strategy Rules: Entry, Exit, and Risk Management

A. Identifying Potential Trading Signals:

  • COT Extreme and Divergence:
    • COT Extreme: Look for periods where Commercials reach historically high net short positions (expecting prices to fall) or historically high net long positions (expecting prices to rise). Conversely, look for Non-Commercials reaching extreme net long or short positions.
    • COT Divergence: This is where price action contradicts the COT data. For example:
      • Bullish Divergence: Price is falling or consolidating, but Commercials are decreasing their net shorts (or increasing their net longs). This could signal that the "smart money" believes the price decline is overdone.
      • Bearish Divergence: Price is rising or consolidating, but Commercials are increasing their net shorts (or decreasing their net longs). This could signal that the rally is unsustainable.
  • Confirmation with Technical Analysis: Use technical indicators to confirm COT signals.
    • Moving Averages: For example, a golden cross (50-day SMA crossing above the 200-day SMA) could confirm a bullish COT signal.
    • Trendlines: Breakouts or breakdowns of trendlines can further validate trading ideas.
    • Support and Resistance Levels: Look for COT signals aligning with key support or resistance areas.
    • Overbought/Oversold Indicators (RSI, Stochastic): These can help you time your entries.
  • Fundamental Analysis Overlay: Consider weather forecasts, storage levels, pipeline capacity, and economic news related to natural gas demand to further refine your trading decisions.

B. Entry Rules:

  1. Bullish Setup:
    • Commercials are significantly reducing their net short positions (or increasing net longs) and/or Non-commercials are decreasing their net long positions.
    • Price shows a bullish reversal pattern (e.g., hammer candlestick, bullish engulfing).
    • Price breaks above a key resistance level or a downtrend line.
    • Overbought/Oversold indicators are not extreme.
  2. Bearish Setup:
    • Commercials are significantly increasing their net short positions (or decreasing net longs) and/or Non-commercials are increasing their net short positions.
    • Price shows a bearish reversal pattern (e.g., shooting star candlestick, bearish engulfing).
    • Price breaks below a key support level or an uptrend line.
    • Overbought/Oversold indicators are not extreme.

C. Exit Rules (Profit Taking & Stop Loss):

  1. Profit Targets:
    • Fixed Reward/Risk Ratio: Aim for a pre-defined risk-reward ratio (e.g., 2:1 or 3:1). Calculate your profit target based on your initial stop-loss level.
    • Fibonacci Extensions: Use Fibonacci extensions to identify potential resistance (for longs) or support (for shorts).
    • Previous Highs/Lows: Look for established highs or lows where the price might encounter resistance (or support).
    • Commercials reversing position: Watch the next COT report. If the commercials start to unwind their positioning, it could be a sign to take profits.
  2. Stop-Loss Orders:
    • ATR (Average True Range): Place your stop-loss a multiple of the ATR below your entry point (for longs) or above your entry point (for shorts). This accounts for the volatility of natural gas.
    • Key Support/Resistance Levels: Place your stop-loss just below a key support level (for longs) or just above a key resistance level (for shorts).
    • Time-Based Stop: Close the position if it has not moved in your favor after a pre-defined period (e.g., 5-10 trading days). This prevents capital being tied up in a stagnant position.
  3. Trailing Stop: Consider using a trailing stop to lock in profits as the price moves in your favor.

D. Risk Management:

  1. Position Sizing: NEVER RISK MORE THAN 1-2% OF YOUR TRADING CAPITAL ON A SINGLE TRADE. Calculate your position size based on the distance between your entry point and your stop-loss level. Use a position size calculator to determine how many contracts to trade.
  2. Diversification: Don't put all your eggs in one basket. Diversify your trading portfolio across different commodities, asset classes, or trading strategies.
  3. Avoid Over-Leverage: Natural gas can be very volatile. Use leverage cautiously, if at all. Excessive leverage can magnify both profits and losses.
  4. Emotional Discipline: Stick to your trading plan. Don't let fear or greed influence your decisions.
  5. Trading Journal: Keep a detailed record of all your trades, including your entry/exit points, rationale, risk/reward ratio, and emotional state. Review your journal regularly to identify your strengths and weaknesses.

V. Example Trade Scenario

  1. COT Signal: The latest COT report shows that Commercials have significantly reduced their net short positions on REX Zone 3 Natural Gas, reaching their lowest net short position in a year. This suggests that they believe prices are poised to rise.
  2. Technical Confirmation: Price has formed a double bottom pattern near a key support level of $2.50. The RSI is also showing a bullish divergence, indicating that the recent price decline might be losing momentum.
  3. Fundamental Overlay: Long-term weather forecasts are predicting a colder-than-average winter in the Midwest, which could increase natural gas demand.
  4. Entry: Enter a long position at $2.55, after the price breaks above the neckline of the double bottom pattern.
  5. Stop-Loss: Place a stop-loss order at $2.45, just below the recent swing low and the support level. (10 cent risk)
  6. Profit Target: Aim for a 2:1 risk-reward ratio, targeting a profit of $0.20 per contract. This places the profit target at $2.75.
  7. Risk Management: Determine your position size so that you are risking no more than 1% of your trading capital on this trade.

VI. Important Considerations

  • Data Frequency: The COT report is weekly. You might consider using intraday or daily charts for your entries and exits.
  • News Events: Be aware of major economic releases, EIA (Energy Information Administration) reports, and geopolitical events that can impact natural gas prices.
  • Seasonal Patterns: Natural gas prices tend to be more volatile during the winter heating season and the summer cooling season. Adjust your trading strategy accordingly.
  • Backtesting: Before deploying this strategy with real money, backtest it using historical data to assess its performance.

VII. Continuous Learning

  • Stay updated on changes in the natural gas market.
  • Monitor the CFTC website for updates on the COT report.
  • Follow reputable news sources and analysts specializing in natural gas.
  • Continuously evaluate and refine your trading strategy based on your results and market conditions.

VIII. Disclaimer (Reinforced)

Trading natural gas futures is highly speculative and involves a significant risk of loss. This is not financial advice. Consult with a qualified financial advisor before making any investment decisions.

By combining the insights from the COT report with technical analysis and fundamental factors, retail traders and market investors can develop a more informed and disciplined approach to trading REX Zone 3 Natural Gas futures. Remember that consistency, risk management, and continuous learning are essential for success in any trading strategy.