Commitments of Traders Report – A Short Guide and how they can help you on trading
Every weekday, traders buy and sell financial products like stocks, bonds, commodities, and indices in their trillions. They trade in the spot market and also in the futures market. In spot, they exchange the real-time price. In the futures market on the other hand, they pledge to buy or sell assets at a certain price.
The financial market is usually very regulated, something very important to protect the retail traders. The regulators in the US include the Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), and the Federal Trading Commission among others.
To promote the transparency in the commodities and futures market, the CFTC usually publishes the Commitment of Traders (CoT) report. The goal of this report is to show how different levels of traders are placing their trades. The report is published every Friday, with the data obtained by the close of business on Tuesday. Examples of Commitments of Traders report are shown below.
CoT – How to read it
As you can see, the report may seem very complicated among new traders. However, as you advance your skills, it will become relatively simple. The data used in the report is supplied by a number of organizations like clearing houses, brokers, and exchanges.
- Non-Commercial: these are a mixture of organizations. They include ordinary traders, hedge funds, and other financial institutions. In most cases, these are traders who are involved in the market for speculation purposes.
- Commercial: these are big companies that use the market for hedging purposes. These include large organizations like airlines, international commodities traders, and other large international traders.
- Long: These are the net long positions that have been reported to the CFTC.
- Short: These are the net short positions that have been reported.
- Open Interest: These are contracts that have not been exercised or delivered.
- Number of traders: The number of traders that are required to report to the CFTC.
- Reportable Positions: The number of of options and futures positions that are required to be reported.
- Non-reportable positions: these are the number of open interest positions that don’t meet the reportable requirements of the CFTC.
To use the Commitments of Traders report, an ideal way is to find the extreme net long or net short positions. When you find these positions, it could be a signal that a market reversal is around the corner. This is because, if everyone is long a currency or a commodity, who is left to short? Similarly, if everyone is short a currency, who is left to sell. The answer to the two questions is no one. Consider the example below:
In this example, the commercial traders are in blue, large non-commercial traders are in green, while the small non-commercial are in red. In this example, ignore the commercial and the small scale positions. As you can see above, the value of net short positions of non-commercial traders dropped between July and September 2008. As the value of the net short positions of the NCT dropped, so did the EUR/USD pair.
In the middle of November, as the net short positions hit the extreme level of 45,650, investors started to buy the EUR futures. As this happened, the EUR/USD pair started to go up.
On the other hand, in early November 2009, the net long positions hit an extreme. Since there were no more buyers, the pair started to move downwards.