The Commitments of Traders report (COT) is a weekly publication that shows the aggregate holdings of different participants in the U.S. futures market.
Each Friday, the CFTC (US Commodity Futures Trading Commission) reports the COT (Commitment of Traders) report. This report shows the changes in open positions of futures traders, including commercials, small speculators, and large speculators.
Traders follow the COT report to identify extreme levels of long or short positions in a currency, which may signal a trend reversal.
The report helps them determine whether they should take short or long positions in their trades.
How to Read the COT Report
The Commitments of Traders (COT) is a report issued by the Commodity Futures Trading Commission (CFTC).
It aggregates the holdings of participants in the U.S. futures markets (primarily based in Chicago and New York), where commodities, metals, and currencies are bought and sold.
The COT is released every Friday at 3:30 ET and reflects the commitments of traders for the prior Tuesday.
The COT provides a breakdown of aggregate positions held by three different types of traders:
- “Commercial traders” (in forex, typically hedgers)
- “Non-commercial traders” (typically, large speculators)
- “Nonreportable” (typically, small speculators).
The Net Non-Commercial Positions are contracts held by large speculators, mainly hedge funds and banks trading currency futures for speculation purposes.
Speculators are not able to deliver on contracts and have no need for the underlying commodity or instrument, but buy or sell with the intention of closing their “sell” or “buy” position at a profit, before the contract becomes due.
These contracts, sold in lot sizes that vary by currency, net out to have either a surplus of buy requests (positive values in the chart) or sell requests (negative values).
The Open Interest represents the total number of contracts, including both buy and sell positions, outstanding between all market participants.
That is, the total of all futures and/or option contracts entered into and not yet offset by a transaction, by delivery, by exercise, and so on. These figures are not netted, but instead show overall volume (that is, interest).
How to Use the Commitments of Traders Report
The Commitments of Traders (COT) reports can sometimes give traders a good idea of future significant moves in the market.
The CFTC requires large speculators and commercial traders, or hedgers, to report their net positions twice each month.
In general, the large speculator category represents fund traders and professional traders who carry large positions. Commercial traders also report their net positions to the CFTC.
The number “non-reportable” positions are derived from subtracting the number of large spec and commercial positions from the total open interest.
This group of traders is generally thought to be small speculators and hedgers who are not holding a position large enough to report to the CFTC.
The COT report’s results can be used as a tool to give traders a better understanding of the psychology of the marketplace, the net position of the commercials in the market, and the net position of the large traders.
Large traders (funds) are typically trend-followers and will add or liquidate their positions depending on the technical action of the market since the release date of the report.
There are many different ways to analyze the reports, but for the most part, the large traders’ net position and “change in position” over a two week period are the most important numbers to watch.
Keep in mind that the small trader’s net position is usually vulnerable to either long liquidation or short-covering if the market starts to move against them.
As a result, a classic bullish set-up for a given market would be when large traders are net long and small traders are net short.
The market will be in a weakened bullish set-up “if” the two-week trend in the large trader position is down, or in other words, if the funds are in the process of liquidating their net long position. This is a warning flag.
The larger the net short position of the small trader (relative to history) and the extent that small traders are holding a position “against” the trend are factors that will add to the bullishness of the report.
A classic bearish set-up in the market exists if large traders are holding a net short position (more bearish if adding to the position in the past two weeks) with small traders net-long the market (more bearish if the net long position is relatively large and the trend is decisively down).
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