Trading with the Commitments of Traders (COT) Report

The Commitments of Traders (COT) report can be a very helpful tool for traders. The Commodity Futures Trading Commission (CFTC) publishes the report on a weekly basis. It provides traders with an overview of the positions that various other traders hold in the futures market. 

So, how do the Commitments of Traders report work? How does it help traders in making informed trading decisions? These are the questions we are going to give answers to in this article. Therefore, keep reading and expanding your knowledge.

Introduction to the Commitments of Traders report

The Commitments of Traders (COT) is a unique report that the U.S. Commodity Futures Trading Commission (CFTC) publishes on weekly basis. The report gives a snapshot of the positions various types of traders hold in futures markets.

The various types of traders include commercial traders, non-commercial traders, and non-reportable traders. As you already know, commercial traders are producers and consumers of the underlying commodity. Non-commercial traders, on the other hand, refer to traders who trade futures for profit. Finally, there are non-reportable traders who represent small traders who do not meet the reporting requirements.

The COT report is very useful for traders and investors operating in the commodity market. How so? Because it offers valuable insights into the market sentiment. Additionally, the report also gives a complete picture of the positions different types of traders hold in the market. Therefore, traders and investors follow the COT report to make informed trading decisions.

How do the Commitments of Traders (COT) report work?

The COT report works on a very simple basis. It consists of three main sections: 

1. Commercial traders – Such as farmers or producers who have a commercial interest in the underlying commodity
2. Non-commercial traders – Such as large investors, hedge funds, and other large speculators who trade for profit
3. Non-reportable traders – Small traders and investors who don’t fulfill reporting threshold.

All these sections provide valuable information to traders and investors. For instance, they can know about the number of contracts each group of traders holds. Additionally, these sections also define whether their positions are long or short. Thus, traders and investors can easily gain insights into market sentiment and potential price movements by analyzing the COT report.

Trading with the Commitments of Traders (COT) Report

We have already established that the Commitments of Traders promises valuable information about the futures market. In this section, let’s see how you can use it in trading. The following are some techniques you can use to get insight from the COT report.

1. Identify market sentiment

As mentioned earlier, the COT report contains information about the number of long and short positions different types of traders hold. This type of information is always very useful. How so? Because it helps in determining the market sentiment. How can you identify the market sentiment? Let’s see.

Firstly, there are commercial traders who are the most informed group of traders among all types of traders in the futures market. This group of traders typically consists of producers and consumers of commodities. So, we can surmise that if an informed group of traders is buying more contracts than selling, they are bullish on the underlying commodity. Contrarily, if that informed group of traders is selling more contracts than buying, it indicates that they are bearish on the underlying security. 

Secondly, non-commercial traders such as large institutional investors or hedge funds. They are typically trend-followers who follow commercial traders. Now, an increase in long positions by non-commercial traders is clearly a bullish signal. Conversely, a decrease in long positions and an increase in short positions by non-commercial traders are clearly bearish signals.

Finally, there are non-reportable traders who are typically small speculators. This group of traders is typically the least informed group. They also have limited resources. Therefore, the net position of this group of traders gives a contrarian signal. It means that if non-reportable traders are heavily involved in long positions, it indicates that the market is overbought and a correction may be imminent.

2. Predict potential price reversals

The Commitments of Traders report also contains net figures of the positions of traders. That means you can learn about the difference between long and short positions. These net figures help you in predicting potential price reversals.

1. When commercial traders have a net long position at an extreme level, it indicates an upcoming price reversal. Conversely, if commercial traders have an extreme net short position, you can expect prices to decline in the near future.
2. Similarly, if large non-commercial traders have a net long position at an extreme level, it indicates an upcoming price reversal because of overbought market conditions. 
3. You can also analyze divergences, if there are any, between the positions of different groups of traders. For instance, the convergence between commercial and non-commercial traders where the former has a huge long net position vs. the heavy net short position of the latter indicates an inevitable price reversal.

3. Confirm the trend

The Commitments of Traders report also helps traders to confirm market trends. Let’s suppose that commercial traders have a long net position and increasing. So, an increasing long position indicates an uptrend in the market. Additionally, the COT report provides insights into the behavior of a different group of traders. You can also use this insight to confirm a trend in the market. For example, net long positions held by commercial traders suggest that they are bullish on the underlying commodity. So, the price of the commodity will rise. Conversely, net short positions held by commercial traders suggest that they are bearish on the underlying commodity. So, the price of the commodity will fall.

Similarly, heavily positioned non-commercial traders on one side of the market are a signal of a market trend. For example, if they hold net long positions, it means they are bullish on the underlying commodity. So, the price of the commodity will rise and vice versa.

Can you make trading decisions based solely on the Commitments of Traders report?

Well, the COT report is undoubtedly a valuable resource for traders. They can get insight into the market sentiment and identify profitable trading opportunities. However, it is highly advisable not to rely solely upon the COT report. It is just one tool among several other tools that traders have at their disposal. As trading is a risky arena and it is your money that is at stake, always look for convergence. Therefore, use the COT report in conjunction with other technical and fundamental analysis tools. This practice enables you to stay on top of trading endeavors and make informed trading decisions.