Traders have the privilege to gain access to a market report that shows the positions of large institutional traders and also the small speculators that are part of each futures category.
The report, called the Commitment of Traders Report (COT Report) is released by the Commodity Futures Trading Commission.
The report can be found here http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm
The COT Report data is segregated into the different commodities, the trader tapes and even the position size.
The report is a very helpful technical tool for traders who speculate in almost any market because it gives you accurate and timely information on various trends and the strength of the tradersâ commitment to these trends.
The COT Report is not just limited to commodities (where it is most commonly associated) but also in other frequently traded futures contracts â currencies, stocks and interest rates.
Essentially, the COT report will show the net long or short trading positions for different available futures contracts and this is categorized for each type of trader.
The three types of traders are:
Commercial traders
These are the traders who trade in behalf of companies and institutions. They use the futures market to help offset risk in the spot market.
This type of trader is not a big help to retail investors. This is usually not given a lot of attention.
Non-commercial traders
Large institutional investors are a part of this type of traders. Also included are hedge funds and other personalities that trade in the futures market for the purpose of investment.
These traders are not directly involved in any way with any of the commodities or assets. This is the category that is given the most attention.
Non-reporting traders
All other traders are lumped into this category. These are usually traders that are too small that they are not required to report their trading positions to the CFTC. This is a category that traders ignore.
Looking at the COT Report you will see what the non-commercial big traders are doing and also gives them an idea on the ongoing or developing trend for each asset class.
Basically, the COT Report will show you where the large investments are going in all asset classes. Of course, of particular importance to forex traders are the dedicated report currency traders.
How To use the COT Report
There is a relatively simple way of using the COT Report to spot trends:
- Plot a minimum of six months of long and short data taken from the non-commercial traders in a spreadsheet. Make sure that you have columns for dates, long positions and short positions.
- Using the plotted data, develop a line chart that will show trends as it progresses through time. The date should be on the Y-axis while the long and short positions are two lines that are located on the X-axis.
- Do an overlay that contains the average prices over the same time period for the commodity, use an independent X-axis for this while at the same time following the dates from the other chart. This will show you the trends that are having an effect on the direction of prices over a certain period of time.
- Try to locate divergence between the two charts â this is where they are both moving in opposing directions. These divergences could signal a possible reversal. To illustrate this â if the price is dropping but more traders are also taking long positions, then you should anticipate a possible positive trend in the forex market or in futures.
About The Author
Mario Singh owns the popular forex site Askmariosingh.com. The site offers articles and analysis for anyone who wants to learn forex trading.
Photo credit: Midhama
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