Commodity traders can access a weekly market report that gives a snapshot of the positions and speculators of large institutions in each commodity futures class. The Commodity Futures Trading Commission provides this information, also known as the “COT report” or the commitment of traders report.
The COT report provides traders with up-to-date information on the trends and the level of commitment they have to each trend in every commodity market. It is an excellent analytical tool. The COT report also provides information on the most traded futures contracts, such as stock indexes and interest rates.
The COT report shows net long and short positions for each futures contract available for three types of traders. A bullish bias will be observed if traders are either increasing their long positions or accumulating large amounts of them. The opposite is true for traders who are shortening or increasing their short positions. This will result in a bearish bias.
The report does not include all traders. Investors tend to pay more attention to the type of trader that is most similar to their own.
- Commercial traders: These traders are companies or institutions that use the futures market as a hedge against risk in the cash market. To protect her profits in the event of a fall in corn prices, a corn producer might short corn futures contracts. Retail investors don’t find this class of trader very useful, so we don’t pay too much attention.
- Non-Commercial traders: This group includes large institutional investors, hedge fund managers and other entities trading in the futures markets for growth and investment. They do not usually directly participate in the production, distribution, or management of the underlying assets or commodities. This category is the most important.
- Non-Reporting Traders – This category covers traders who are too small to be required by the CFTC to report their positions. Non-reporting traders don’t allow us to know the number of individual traders or the type of investors they represent. Market professionals believe that the majority of these traders are individual speculators. They are known for being bad traders. You will see them more often betting against the trend than in support of it. This category is not worth our attention.
The Live COT Data provides insight into the trends for an asset class by revealing the activities of non-commercial traders. These reports can be used to determine the trend for any asset class. These reports are useful for spot forex traders, stock futures investors, commodity traders (including gold and oil), and currency traders.
Although the “COT” or commitment of traders report is valuable, the raw data from CFTC can be a bit confusing and dense without any historical context. It’s usually easier to view changes over time than just one snapshot. This problem can be solved by historical graphs of COT report data.
Each week, you can examine the report and create a graph for each of the commodities that you trade. The CFTC releases data every Friday, but the report is always current on the Tuesday prior to each Friday’s publication. You can access the data on the CFTC website. It is prominently displayed right from the homepage.
A long text file can be used to track changes in COT data each week. Below is an example of how this works with crude oil futures. I’ve highlighted some features I already discussed in the previous section.
- You should pay attention to the non-commercial traders column. The right-hand column contains commercial traders who are mainly hedging. They will often position themselves in the opposite direction to non-commercial investors and speculators.
- You can see that there is a slight bias among non-commercial traders towards long oil positions. Although technically this is bullish, there are warning signs.
- An indicator of investor sentiment is the change in short or long positions. Since last week, long positions have decreased while short positions have increased. This suggests that bullish sentiment is on the decline.
COT Report on Crude Oil
Since mid-June, the trend in declining bullish sentiment has been similar to this image. Below is a chart showing crude oil’s reaction to falling investor bullishness. Investor sentiment cooling means that traders might become more cautious about taking on risk and may opt for tighter stops or other protective options.
Daily Crude Oil Price Chart
The weekly data can be useful, but it is also possible to see historical context by looking at the information in a chart. These charts can be found online at many great, free sites. You can also create your own version to display the commodity contracts that you are interested in.
The COT report shows the commitment of large institutional traders to either short or long positions in each currency pair. The COT graph will display traders who are net short. Those who are net long will be shown as a negative position. The COT charts show the rate at which these balances change.
This video will show you an example showing the net position of these large traders in EUR/USD at that time. Because they can be used for inferring sentiment in related markets, currency COT charts are especially useful. A falling USD/CAD would be bullish for oil, while falling AUD/USD would be bad for gold.
You can access the COT report free of charge from www.cftc.gov if you’re interested in independent research.
You can use the COT Report in the same manner as a traditional technical indicator, which only analyses price and time. We can also apply filters to the report to see if traders are net short or long, and if they are becoming more bullish or bearish. This shift in investor sentiment can be used to predict the “flip” or trigger trade entry or exit.
Below is the chart showing the COT report graph of the AUD/USD. On 9/19/2008, you can see that the net long has flipped to net short. This is not surprising considering the price action at that time. Below is a price chart that shows what was happening. The black line on the COT chart indicates whether traders were net short or long. However, the red line analyzes the data further to determine the rate at which that net short bias has changed.
The graph of the AUD/USD COT report
Weekly Chart of AUD/USD for the same period that the COT chart above
You can see that traders were net short, but they had been trending towards bullishness rather than bearishness as measured by the red line. This is the rate at which sentiments change. This information can be used to assume that the trend is down (based upon the black line), but that there could be a flip in the near future (based on uptrending red lines). It is easy to create trading systems or use it to determine your bias. These are just two examples of how you can use this information.
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- It is easy to build a simple system using this information. As an example, suppose that you bought the currency pairs every time the red sentiment lines crossed above the middle point of the graph. Then you reversed your decision and shorted them when the sentiment line crossed below or at the neutral level. This is a simple example, but it could prove to be very effective when combined with a diversification strategy or appropriate risk management.
- The sentiment line (red), and the net short/long line (black) are both important indicators of trend. The sentiment line is used by short term traders to determine the type of trades they want (long or shorter) based upon the trend or direction of the red line. Longer term traders might only choose trades that are in line with the net position of the blackline. These are a great way to determine investor sentiment and understand the strength or weakness of the underlying trend.