Very often, we read about sharks or wolfs of finance that have the power to move markets in the direction they want. This is the mythology of trading but, to be able to take rationally my investing decisions, I need numbers, not legends. Where I can find this data about the most important market players? Simple, into an official and well-known report: the Commitment of Traders (COT).
What is the Commitments of Traders report?
Where to go to get the COT report and how to read it
How to use the COT report
Conclusions and suggestions
What is the Commitments of Traders report?
The Commitments of Traders (COT) report is a weekly document, published online every Friday by the Commodity Futures Trading Commission (CFTC) at 3:30 Eastern time, which shows the aggregate holdings of the participants in the U.S. futures market.
It started in 1962 when it was published monthly.
Where to go to get the COT report and how to read it
Here’s where to find the Commitments of Traders report online: Commitments of Traders.There are four different kinds of reports: Legacy, Supplemental, Disaggregated, and Traders in Financial Futures report.
You can find the description of the types of reports at the top of the page that contains the COT.
In addition, we have two formats: Short and Long, respectively, with less and more data.
For example, I suggest going to the end of the page, where is written “Current Legacy Reports:” and clicking with the mouse on the Long Format (Future only) of the Chicago Mercantile Exchange.
The Chicago Mercantile Exchange (CME) is an organized (very large and important) exchange for trading futures and options in the sectors of agriculture, energy, stock indices, foreign exchange, interest rates, metals, and real estate.
We'll see something like this on the screen of our computer:
Example of COT report (source: https://www.cftc.gov/).
There are three groups of market players: Non-Commercial (or Large traders), Commercial (or Hedgers), and Non-reportable (or Small traders).
Non-commercial traders (or Large traders) have no direct business interests in the commodity that they are trading; they are only trying to profit from price moves in the market. They are trend-following operators (in the opposite way to Commercials); therefore, following them, we also follow the main market trend. Moreover, they are found to operate very rarely in the “wrong” direction of the market, which they are able to influence in an important way.
Commercial traders (or Hedgers) are in the futures market to primarily hedge their core business activities. They are interested in the purchase/sale of the asset underlying the futures contract (we could say that they are interested in the “real economy”), for example, for industrial production needs. Therefore, even if it is not immediately obvious, they tend to operate against the trend.
Non-reportable traders (or Small traders) are buyers or sellers of futures whose transaction sizes are relatively small. Retail traders would fall under this category. The amount of small traders active in the market is calculated by taking the total volume for the entire marketplace and subtracting the volume reported by large traders. Usually, they have not had a significant ability to influence or manipulate the market, so they are not relevant.
The Open Interest is the total number of outstanding contracts that are held by market participants.
Therefore, the first takeaway is: “Follow the Non-commercial traders!”
If we want to save a copy of the report on our computer, just tell the browser we are using to proceed with "Save page as ..." and, as a file type, the one with the .txt extension.
However, it is clear that working with a simple text file is not practical; it would be much better to work with a graph.
On the internet, as usual, we easily find everything we need.
For example, we can go to the famous myfxbook site: Myfxbook-Commitments of traders.
This is what we can see:
View of the COT graph for Euro FX Futures (source: Myfxbook).
The graph of the COT Report that we have shown is made up of three lines:
Non-Commercial / Large traders are indicated by the orange line.
Commercial / Hedgers are indicated by the brown line.
Small traders are indicated by the blue line.
The ones displayed are the net positions, so the difference between the number of Long contracts and the number of Short contracts.
Therefore, in essence, the graph of the COT Report represents the “Market sentiment”.
Obviously, on the internet you can find many other COT graphs: search for your favorite one! (Warning: check that the data is up-to-date).
You can also search for a COT indicator for your favorite trading/analysis platform. (For example https://www.tradingview.com/scripts/commitmentoftraders/ )
How to use the COT report
As I have written, the COT report contains the aggregate positions held by the three different categories of traders.
The real advantage of the Commitments of Traders report is to monitor the change in positions over time. What we need to find out is whether Large traders are adding or reducing contracts over time from their positions.
So, first of all, you can use the COT as a “filter” for your financial activity:
- if the net position of Non-Commercial / Large traders is > 0 then you could only buy at the market;
- if the net position of Non-Commercial / Large traders is < 0 then you could only sell at the market.
Nevertheless, it can be used as a filter also if you are already in the market:
- if the net position of Non-Commercial / Large traders is decreasing, then you could close your Long position;
- if the net position of Non-Commercial / Large traders is increasing, then you could close your Short position.
Therefore, COT is our market sentiment indicator, but remember that the Commitments of Traders report is published weekly, so it must be considered a sentiment indicator for the next weeks or months, not for tomorrow morning!
Another clever use of COT is searching for extreme (large) net long or net short positions (signaled by relevant tops and bottoms on the graph). This fact may indicate that a market reversal is just around the corner.
Conclusions and suggestions
Takeaways:- If you want to follow the most important market players, follow the COT report of Non-commercial traders.
- Use the COT report to determine whether you should take short or long positions, from a medium and long-term perspective.
- To simplify your analysis use a graph or an indicator for your favorite platform.
- Watch the COT, before taking any investing/trading decision!
- Search on the internet to find your favorite site with a COT graph or an indicator for your trading/analysis platform.
A sincere wish of good work to all!
Written by F. GRAMOLA (*).
(*) Member of S.I.A.T., the Italian Society of Technical Analysis (member society of I.F.T.A. – International Federation of Technical Analysts).
Warning
We merely cite our personal opinions for educational purposes only.
Investing and trading are risky. Don't invest or trade money that you cannot afford to lose.
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Initial Photo by Markus Winkler on Unsplash.
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