Commitments of Traders Report (COT)

The Commitment of Traders (COT) report is a weekly publication that shows the aggregate holdings of different participants in the U.S. futures market.
The CFTC (US Commodity Futures Trading Commission) reports the COT (Commitment of Traders) report every Friday.
This report indicates 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 understand 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 collects participants' holdings in US futures markets (primarily based in Chicago and New York), where commodities, metals, and currencies are traded.
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 unable 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 depend on the currencies net out to have either a surplus of buy requests (positive values in the chart) or sell requests (negative values).
The Open Interest shows the total number of contracts including both buys and sell positions, outstanding between all market participants.
Therefore, the total of all futures and / or options contracts that has been entered and has not yet been fulfilled by any transaction, by delivery, by practice, etc. These figures are not nets, but instead represent the total volume (ie interest).

How to Use the COT Report

The Commitments of Traders (COT) reports often help the traders to have an idea regarding the significant moves of the market in future.
The CFTC need large speculators and commercial traders, or hedgers, to report their net positions twice each month.
Generally, 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 obtained from subtracting the number of large spec and commercial positions from the total open interest.
This group of traders is considered as small speculators and hedgers who are not holding a position large enough to report to the CFTC.
COT report’s results are a useful tool that can give traders a good perception 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.
Reports are generally analyzed using various methods, but the most important numbers to consider are, the large traders’ net position and “change in position” over a two week period
It is pertinent to remember here that the net position of the small trader is usually vulnerable to either long liquidation or short-covering if the market starts to move against them.
Finally, the result comes that bullish trend occurs in the market when large traders are net long and small traders are net short.
“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, the market will be in a weakened bullish set-up. 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 occurs in the market 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 net long position is relatively large and the trend is decisively down).

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