Introduction To The Commitment Of Traders (COT) Report
Introduction To The Commitment Of Traders (COT) Report
Commitments of Traders (COT) Report is a market report posted on Friday byU.S. Commodity Futures Trading Commission (CFTC) on the Tuesday's open interest of Traders who are obliged by law to report on their open positions. It is used by Forex Traders.
The report looks at 3 Major Players in the Market. It breaks down Total Open Interest (O/I) into the 3 players' Long and Short positions. The 3 Traders are the Commercials, the non-Commercials and the Non-reportables.
A sample of the COT Report is show below.
The Commercials are commonly known as Smart Money, Big Dogs and Hedgers. They are usually the Producers and Consumers of the product or commodity. They have deep pockets and have the best knowledge and information of the market. Being Hedgers, they have positions on the Spot, Futures and Option market for their daily operations. They usually used Futures and Options market to reduce their risk exposure, thus hedging their risk over Spot Market.
The non-Commercials are also known as Large Speculators. They are usually trading the market without settlement, ie They do not want the physical product, they speculate in order to profit in the market.
The nonreportables are have the same objectives as the non-Commercials, and are usually negligible since their positions are rather small as compared with the 2 former.
One of the most common methods to analyse COT Report is using Net Positions and Total Open Interest. The setup will have the Commercials' Net Position and Total Open Interest, along with the Price Chart for Sentiments Analysis.
Net Position is derived from the difference between the Long Position and the Short Position. Whereas, Total Open Interest is the sum of Short Positions of the 3 Traders, which is a given value in COT Report.
In summary, when Commercials' Net Position is on extreme long position, with increased Total O/I, it is likely that the up trend will continue. Likewise if Commercials' Net Position is on extreme short position, with increased Total O/I, it is likely that the down trend will continue.
However, an ideal bull rally is when the Commercials' Net Position is on the extreme short position, with high Total O/I. This is due to extreme imbalance of the market, with most of the Traders on the Short side, thus, with no else willing to sell further. Therefore, a start in buying may eventually lead to the Bullish Rally, as more traders are squaring off their positions, short-covering their positions or even reverse their position.
An example of extreme Long position with High Total O/I is found here.
An illustration of extreme Short position with High Total O/I is found here.
Lastly, COT Analysis is a Sentiment Analysis, which does not contribute to an immediate Buy or Sell Signals. It gives an insight to the Big Traders Sentiments and with proper Technical Analysis, a speculator could tap this insiders' information to ride a BIG trend.
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