Forex for a trader
How to use cot report in forex trading

How to use cot report in forex tradingHow to Use the COT Report for Trading. Since the COT report comes out weekly, its usefulness as a market sentiment indicator would be more suitable for longer-term trades. The question you may be asking now is this: How the heck do you turn all that “big giant gobbled-up block of text” into a sentiment-based indicator that will help you grab some pips?! Finding these positions may signal that a market reversal is just around the corner because if everyone is long a currency, who is left to buy? And if everyone is short a currency, who is left to sell? Yeah, that’s right. NO ONE. You can’t keep going since there’s no more road ahead. The only thing to do is to turn back. Let’s take a look at this chart of the EURUSD from TimingCharts : On the top half, we’ve got the price action of EURUSD going on. At the same time, on the bottom half, we’ve got data on the long and short positions of EUR futures, divided into three categories: Commercial traders (blue) Large Non-commercial (green) Small non-commercial (red) Ignore the commercial positions for now, since those are mainly for hedging while small retail traders aren’t relevant. Let’s take a look at what happened mid-way through 2008. As you can see, EURUSD made a steady decline from July to September. As the value of the net short positions of non-commercial traders (the green line) dropped, so did EURUSD. In the middle of September, net short positions hit an extreme of 45,650 . Soon after, investors started to buy back EUR futures. Meanwhile, EURUSD rose sharply from about 1.2400 to a high near 1.4700! Over the next year, the net value of EUR futures position gradually turned positive.

As expected, EURUSD eventually followed suit, even hitting a new high around 1.5100. In early October 2009, EUR futures net long positions hit an extreme of 51,000 before reversing. Shortly after, EURUSD began to decline as well. Holy Guacamole! Just by using the COT as an indicator, you could have caught two crazy moves from October 2008 to January 2009 and November 2009 to March 2010. If you had seen that speculative traders’ short positions were at extreme levels, you could have bought EURUSD at around 1.2300. This would have resulted in almost a 2,000-pip gain in a matter of a few months! Now, if you had also seen that net long positions were at an extreme in November 2009, you would have had sold EURUSD and you could have grabbed about 1,500 pips! With those two moves, by using the COT report as a market sentiment reversal indicator , you could have grabbed a total of 3,500 pips. Pretty nifty, eh? Commitment of Traders Report.

The Commodity Futures Trading Commission, or CFTC, publishes the Commitment of Traders report (COT) every Friday, around 2:30 pm EST. Because the COT measures the net long and short positions taken by speculative traders and commercial traders, it is a great resource to gauge how heavily these market players are positioned in the market. Later on, we’ll let you meet these market players. These are the hedgers, large speculators, and retail traders . Just like players in a team sport, each group has its unique characteristics and roles. By watching the behavior of these players, you’ll be able to foresee incoming changes in market sentiment. You’re probably asking yourself, “Why the heck do I need to use data from the FX futures market?” “Doesn’t the spot forex market have a report that measures how currency traders are positioned?” “I’m a spot forex trader! Activity in the futures market doesn’t involve me.” Remember, since spot forex is traded over-the-counter (OTC), transactions do not pass through a centralized exchange like the Chicago Mercantile Exchange. So what’s the closest thing we can get our hands on to see the state of the market and how the big players are moving their money?

The Commitment of Traders report from the futures market. Before we dive into how to use the Commitment of Traders report as a forex trader, you have to first know WHERE to go to get the COT report and HOW to read it. Track The Largest Traders With The Commitment of Traders (CoT) Report. by Tyler Yell, CMT , Forex Trading Instructor. Position Trading based on technical set ups, Risk Management & Trader Psychology. Your Forecast Is Headed to Your Inbox. But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to Tyler Yell. You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form.

Please try again later. What Is The Commitment of Traders Report? Who Are the Players In The Report? How to Read CoT for Directional Bias. What Is the Commitment of Traders Report? How would you like to know what the smartest guys and girls in the room are doing? Thanks to a requirement by the Commodity Futures Trading Commission, the largest futures traders in the world are required to report their positions which can easily be tracked due to the margin they must pay to hold their large positions which the CFTC has been publishing since 1962 and since 2000, every Friday at 3:30ET pm. This information can be of extreme help due to the people who come into the Futures market like hedge funds to make a return above their respective index or some of the largest companies in the world with real-time data of the health of the economy that come to the futures market to hedge their exposure to price fluctuations of raw materials that they use to make their product or preform their service. Learn Forex: CoT Report for Euro FX (EURUSD) as of 01282014. It may be helpful to think of the CoT report as a sentiment indicator with a lot more depth than most indicators.

The depth, of course, comes from the fact that the readings are based on the largest future traders and can help you see when large fortune-500 companies switch their outlook on something that you’re trading. In short, this report provides incredible levels of insider intelligence that you’d be hard-pressed to find in another avenue. Who Are the Players In The Report? Commercials – Using the futures market primarily for hedging unfavorable price swings to their daily operations. They likely have the best insight as to what the demand and future is for the market as a hole and have some of the deepest pockets. These players are also known as commercial hedgers. Examples: Coca Cola in the Sugar Market or American Airlines in the Gasoline Market. Non-Commercials (Speculators Funds) – Traders, whether hedge-funds are large individuals, who have no interest in taking delivery but are rather in the market for profit and meet reportable requirements of the CFTC. Examples: Hedge Funds and large banks or large Commodity Trading Advisors (CTAs) Nonreportable Positions – Long & Short open interest on positions that don’t meet reportable requirements, i. e. small traders. Examples: This is the leveraged players without deep pockets and are shaken out on big moves, similar to the DailyFX SSI. How to Read the CoT for Directional Bias? Upon the first reading of the CoT, you may be confused how future positions in USD, JPY, GBP or EUR could be helpful for trading EURUD, USDJPY, or EURGBP. There is a lot to learn about the Commitment of Traders report but what’s often helpful is to find when there is a very strong divergence between large speculators and large commercials. Learn Forex: Look to See What Hedge Funds Are Buying Selling. Learn Forex: Non-Commercials Hedge Funds Sold USDJPY Longs & Charts Confirm This. Chart Created by Tyler Yell, CMT. The first place to start with is a clean understanding of Net Positioning w hich is shown clearly on the repo rts and the week over week differential of major market bias (circled above) .

It may be helpful to know that what you’re looking for isn’t as much the specific number but a clear sign in % of open interest or bias so that you see Non-Commercials Funds flipping against the primary trend. Furthermore, when you see a key flip in sentiment of non-commercials funds who are in it for the money and not to be hedged like commercials, and there is a confirmation on the charts that a trend is exhausting, you are likely trading in the direction of the big kids. As you can see from the last report in January, the number of funds off-loading the JPY shorts increased dramatically from the week prior. When you see this type of shift from major funds, you can look for other signs that show the prior trend is losing steam and that maybe you should exit the trade too. The chart above of USDJPY notes that there have been 4 bearish key days on USDJPY since the start of 2014 at the same time non-commercials have unloaded their USDJPY longs JPY shorts giving credence that this move down may have more to go. Another excellent tool, is the Commitment of Traders Analysis from DailyFX . This weekly report provides analysis of the CFTC report, showing the positioning of Forex futures trades with a synopsis of the key flips in positioning. This report also helps traders by providing 52-week percentiles of major moves so you can see if we’re currently at annual bullish bearish extremes so that you should be tightening stops or looking for price action to confirm the funds are selling out so that you can follow. Bottom Line: Look for Chart Validation of what the Non-Commercial Are Doing. When you have a large percentage (greater than 10%) of non-commercials flipping their bias, it’s time for you to take note. Lastly, if you want to really juice up your understanding of market sentiment, you can get a better feel for how a sample group of non-reportables or smaller traders are positioned in OTC FX via the DailyFX Speculative Sentiment Index which is updated twice a day . ---Written by Tyler Yell, CMT. Trading Instructor Currency Analyst. To contact Tyler, email [email protected] com. Follow me on Twitter @ForexYell. To receive Tyler’s analysis and educational emails directly to your inbox, please sign up here. Interested In Our Analyst's Best Views On Major Markets?

Check Out Our Free Trading Guides Here. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Using the COT Reports to Predict Forex Price Movements. Before examining the COT reports and a few ways of using them, let us note two important details: One of the major problems with the forex market is the lack of a volume indicator. Since there is no forex exchange such as the Nikkei or the NYSE, volume statistics on the entire market are not available. The COT report, tracking the currency and commodity futures allocations of the major speculators and commercial hedgers, is an excellent substitute for the volume indicator, and it should therefore be an inseparable item of any technical trading scheme. The other point which we would like to emphasize is the lagged nature of the report. As it updates us on positions of the past week, it is a lot more valuable as a long-term indicator, with periods of weeks, rather than days being the field of its measurements. The COT (commitment of traders) is a report issued by CFTC to update the public on the futures positioning of traders in commodities markets. In the US most futures trading takes place in Chicago and New York, and the institutions covered by the report are heavily concentrated in these locations. Let’s examine the body of a COT report. EURO FX – CHICAGO MERCANTILE EXCHANGE Code-099741 FUTURES ONLY POSITIONS AS OF 031709 | ————————————————————–| NONREPORTABLE NON-COMMERCIAL | COMMERCIAL | TOTAL | POSITIONS ————————–|—————–|—————–|—————– LONG | SHORT |SPREADS | LONG | SHORT | LONG | SHORT | LONG | SHORT ——————————————————————————– (CONTRACTS OF EUR 125,000) OPEN INTEREST: 111,077 COMMITMENTS 33,657 42,696 548 37,055 34,864 71,260 78,108 39,817 32,969 CHANGES FROM 031009 (CHANGE IN OPEN INTEREST: -69,201) -273 -1,466 -1,371 -67,685 -64,551 -69,329 -67,388 128 -1,813 PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS 30.3 38.4 0.5 33.4 31.4 64.2 70.3 35.8 29.7 NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 99) 38 30 7 19 17 60 51. Open interest describes the amount of open futures contracts that are being held.

In other words, it is the total volume of open contracts in the market, but not the transactions. Reportable positions are the positions held by institutions that meet the reporting requirement of the CFTC. These are the major players in the CBOT, and their choices are usually backed by hordes of analysts and their studies. Non-reportable positions cover everyone who do not suit the above criteria, and they are also termed small speculators. Of reportable positions, non-commercial includes all actors who do not possess any interest in making use of the underlying currency or commodity, such as hedge funds, brokerage firms, investment banks and other related firms. Commercial open interest is created by firms that have the desire to receive or deliver the underlying. Thus the roles played by the two categories of traders is quite different. Spreading covers those trades who hold an equal number of long-short positions on the future contracts. The report provides data on the percentage of long or short contracts to the total, on the number of traders in all three categories with positions on a currency, and finally the changes in open interest in comparison with the previous reporting period.

Over the years the COT report has become quite a popular tool for all kinds of traders. Here are a number of ways of exploiting the data provided by the COT report. 1. Creating a currency portfolio based on the COT report positioning. We can use the COT report data to create a diversified currency portfolio. By examining the COT report, we can have a good idea of the attitude of major traders toward the USD, but to make real use of the the data we must create a portfolio of currency pairs, such as AUDUSD, EURUSD, USDJPY. Since the market can be, overall, long the USD, but can be short the USD against one or more currencies, we do not want to be caught holding a pair in which the USD will lose value, while the COT is still long. Let us now suppose that the non-commercial sector is overall long the USD in our example. What should be the criteria in deciding the currency pairs that will be included in our portfolio in such a situation? In general, it’s a good idea to make our portfolio interest-neutral, so as to express in our currency allocations our USD-positive idea, while declining to say much about the currencies we will short. For instance, we will short AUDUSD and EURUSD (and the carry is negative) and long USDJPY and then we will manage our currency pair ratios in such a way that the total interest received will not exceed the Fed rate. Why do we do this? Because all we want to do is to gain from the appreciation of the USD while limiting the volatility caused by the carry trade.

By making our position interest-neutral, we will, we expect, be able to ride through such disruptions. This will reduce the volatility of our portfolio, and will also reduce the potential return from our investment, but it does create a longer-lasting, more resilient position. Another, but much riskier way to create our COT-report based portfolio would be to simply long what the commercial sector is long, and to short the commodity or currency in which the non-commercial traders are long. Thus, for instance, if the commercial sector is long the EUR, and the speculative sector is long the AUD, the trader would simply arrange his portfolio to reflect the market’s choice by assigning a large part to EURAUD. And one can go on with this method, to create an interest-neutral portfolio in the previously described way, thereby limiting the volatility of the position, and ensuring a more successful long-term strategy. 2. Exploiting reversals in positioning to create a portfolio. It’s also possible to arrange the above mentioned portfolios to profit from trend reversals as signaled by COT reports, but we caution against this method, unless the trader carefully hedges his position by trading uncorrelated(or negatively correlated) pairs. Correlations statistics of currency pairs are available from most major forex brokers. It is nonetheless true that major changes in the strength of a trend, or its reversal on a permanent basis, are indeed noted by changes in open interest, and institutional positioning. Our only suggestion is that the trader be aware of the potential of false signals, and, as per the usual principle, avoid trying too hard to catch bottoms and tops. 3. Using the COT report as a long term volume indicator. An exceptionally useful and prudent use of the COT report is regarding it as a volume complement to the price studies generated by conventional technical analysis.

The trader can simply refuse to act when a technical signal fails to be confirmed by a similar movement (signaled in increasing open interest) in the COT report. For an uptrend, he would expect a corresponding rise in open interest, and for a down trend, a corresponding fall. It is also possible to devise indicators for this purpose, and MACD, Williams Oscillator, or Stochastics can all be drawn on the COT report data. This approach is akin to using volume and price data simultaneously while exploring stock market charts, and those with experience in that field will easily grasp the importance of the COT report. Nonetheless, those with little knowledge of other markets can still greatly benefit from its utilization, especially when trading on a purely technical basis. 4. Using flips in positioning to predict market reversals. In the sample COT chart above, non-commercial net positioning for Euro is short, since 38 percent of traders are holding short positions, while thirty percent hold longs. One way of exploiting this segment of the COT report is by taking note when net positioning switches from long to short and vice versa, and predicting forex market reversals on that basis. In the above example, when net positioning of the non-commercial sector switches to long, we would use the development as a signal for buying euros, coupled with some input from other sources of technical analysis. While this method can produce results that are much more reliable than those generated by pure technical analysis, the trader should still be aware of whipsaws and unpredictable spikes and collapses that can sometimes arise. Percentage values are easier to recognize, and are easier for recognizing position flips. 5. Using extreme positioning to gauge market exhaustion. Comparing long or short positioning with historical extremes can also be beneficial in identifying market extremums. Experience shows that there are absolute values which indicate a bought-out, or sold-out currency, and as the COT positioning hits these values, there’s a significant chance of a rapid reversal.

Extremums can also be termed bubbles, as they characterize a market that is already in an unsustainable phase of rise or fall. The problem with this method lies in the fact that it’s always hard to pick up tops and bottoms: there’s no reason to expect that positioning cannot exceed a previously registered high, before collapsing. Still, if one has the determination and the resilience, extremums reported by the COT report have much greater value than that reported by price based technical analysis. It is possible to confirm the absolute extremes on the COT report with extremes on moving averages or oscillators on the price chart. The COT report is a very useful tool which can be substituted for the volume indicators of stocks analysis. Absolute long and short positioning and historical comparisons can be useful for identifying market extremes. Percentage changes in open interest can be valuable in noting position flips and predicting market reversals in the medium term. If there ever were an ultimate technical indicator, its seekers have their greatest luck in COT data. But the old advice on not putting all eggs in the same basket is still valid: it’s better to confirm signals from the COT report with data from other aspects of technical analysis, and of course fundamental analysis, before reaching decisions. Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you. Forecast The FX Market With The COT Report.

Between 2001 and 2004, volume in the foreign-exchange market increased more than 50%, illustrating the overall rise in popularity of currency trading. The advent of online trading following the technology boom has allowed many equity and futures traders to look beyond their more traditional trading instruments. Most short-term traders or speculators trade FX based on technical analysis, so equity and futures traders who use technical analysis have made the switch to FX fairly easily. However, one type of analysis that traders have not been able to transfer over to currencies is volume-based trading. Since the currency market is decentralized and there is no one exchange that tracks all trading activities, it is difficult to quantify volume traded at each price level. But in place of volume-based trading, many traders have turned to the Commodity Futures Trading Commission's Commitments of Traders (COT) report, which details positioning on the futures market, for more information on positioning and volume. Here we look at how historical trends of the COT report can help FX traders. (Find out how to gauge the psychological state of a currency market in Gauging Major Turns With Psychology .) What is the COT Report? The Commitments of Traders report was first published by the CFTC in 1962 for 13 agricultural commodities to inform the public about the current conditions in futures market operations (you can find the report on the CFTC website here). The data was originally released just once a month, but moved to once every week by 2000. Along with reporting more often, the COT report has become more extensive and - luckily for FX traders - it has also expanded to include information on foreign currency futures. If used wisely, the COT data can be a pretty strong gauge of price action. The caveat here is that examining the data can be tricky, and the data release is delayed as the numbers are published every Friday for the previous Tuesday's contracts, so the information comes out three business days after the actual transactions take place. Reading the COT Report Figure 1 is a sample euro FX weekly COT report for June 7, 2005, published by the CFTC.

Here is a quick list of some of the items appearing in the report and what they mean: Commercial - Describes an entity involved in the production, processing, or merchandising of a commodity, using futures contracts primarily for hedging Long Report - I ncludes all of the information on the "short report", along with the concentration of positions held by the largest traders Open Interest - T he total number of futures or options contracts not yet offset by a transaction, by delivery or exercise Noncommercial (Speculators) - T raders, such as individual traders, hedge funds and large institutions, who use futures market for speculative purposes and meet the reportable requirements set forth by the CFTC Nonreportable Positions - L ong and short open-interest positions that don't meet reportable requirements set forth by the CFTC Number of Traders - The t otal number of traders who are required to report positions to the CFTC Reportable Positions - T he futures and option positions that are held above specific reporting levels set by CFTC regulations Short Report - S hows open interest separately by reportable an non-reportable positions Spreading - M easures the extent to which a non-commercial trader holds equal long and short futures positions. Taking a look at the sample report, we see that open interest on Tuesday June 7, 2005 , was 193,707 contracts, an increase of 3,213 contracts from the previous week. Noncommercial traders or speculators were long 22,939 contracts and short 40,710 contracts - making them net short . Commercial traders, on the other hand, were net long , with 19,936 more long contracts than short contracts (125,244 - 105,308). The change in open interest was primarily caused by an increase in commercial positions as noncommercials or speculators reduced their net-short positions. Using the COT Report In using the COT report, commercial positioning is less relevant than noncommercial positioning because the majority of commercial currency trading is done in the spot currency market, so any commercial futures positions are highly unlikely to give an accurate representation of real market positioning. Noncommercial data, on the other hand, is more reliable as it captures traders' positions in a specific market. There are three primary premises on which to base trading with the COT data: Flips in market positioning may be accurate trending indicators. Extreme positioning in the currency futures market has historically been accurate in identifying important market reversals . Changes in open interest can be used to determine strength of trend. Flips in Market Positioning Before looking at the chart shown in Figure 2, we should mention that in the futures market all foreign currency exchange futures use the U. S. dollar as the base currency. For Figure 2, this means that net-short open interest in the futures market for Swiss francs (CHF) shows bullish sentiment for USDCHF.

In other words, the futures market for CHF represents futures for CHFUSD, on which long and short positions will be the exact opposite of long and short positions on USDCHF. For this reason, the axis on the left shows negative numbers above the center line and positive numbers below it. The chart below shows that trends of noncommercial futures traders tend to follow the trends very well for CHF. In fact, a study by the Federal Reserve shows that using open interest in CHF futures will allow the trader to correctly guess the direction of USDCHF 73% of the time. Flips - where net noncommercial open-interest positions cross the zero line - offer a particularly good way to use COT data for Swiss futures. Keeping important notation conventions in mind (that is, knowing which currency in a pair is the base currency), we see that when net futures positions flip above the line, price action tends to climb and vice versa. In Figure 2, we see that noncommercial traders flip from net long to net short Swiss francs (and long dollars) in June 2003, coinciding with a break higher in USDCHF. The next flip occurs in September 2003, when noncommercial traders become net long once again. Using only this data, we could have potentially traded a 700-pip gain in four months (the buy at 1.31 and the sell at 1.38). On the chart we continue to see various buy and sell signals, represented by points at which green (buy) and red (sell) arrows cross the price line. Even though this strategy of relying on flips clearly works well for USDCHF, the flip may not be a perfect indicator for all currency pairs. Each currency pair has different characteristics, especially the high-yielding ones, which rarely see flips since most positioning tends to be net long for extended periods as speculators take interest-earning positions. Extreme Positioning Extreme positioning in the currency futures market has historically also been accurate in identifying important market reversals.

As indicated in Figure 3 below, abnormally large positions in futures for GBPUSD by noncommercial traders has coincided with tops in price action. (In this example, the left axis of the chart is reversed compared to Figure 2 because the GBP is the base currency.) The reason why these extreme positions are applicable is that they are points at which there are so many speculators weighted in one direction that there is no one left to buy or sell. In the cases of extreme positions illustrated by Figure 3, every one who wants to be long is already long. As a result, exhaustion ensues and prices begin reversing. Changes in Open Interest Open interest is a secondary trading tool that can be used to understand the price behavior of a particular market. The data is most useful for position traders and investors as they try to capitalize on a longer-term trend. Open interest can basically be used to gauge the overall health of a specific futures market; that is, rising and falling open interest levels help to measure the strength or weakness of a particular price trend. (To learn more, read Gauging Forex Market Sentiment With Open Interest .

) For example, if a market has been in a long-lasting uptrend or downtrend with increasing levels of open interest, a leveling off or decrease in open interest can be a red flag, signaling that the trend may be nearing its end. Rising open interest generally indicates that the strength of the trend is increasing because new money or aggressive buyers are entering into the market. Declining open interest indicates that money is leaving the market and that the recent trend is running out of momentum. Trends accompanied by declining open interest and volume become suspect. Rising prices and falling open interest signals the recent trend may be nearing its end as fewer traders are participating in the rally. The chart in Figure 4 displays open interest in the EURUSD and price action. Notice that market trends tend to be confirmed when total open interest is on the rise. In early May 2004, we see that price action starts moving higher, and overall open interest is also on the rise. However, once open interest dipped in a later week , we saw the rally topped out. The same sort of scenario was seen in late November and early December 2004, when the EURUSD rallied significantly on rising open interest, but once open interest leveled off and then fell, the EURUSD began to sell off. Summary One of the drawbacks of the FX spot market is the lack of volume data. To compensate for this, many traders have turned to the futures market to gauge positioning. Every week, the CFTC publishes a Commitment of Traders report, detailing commercial and non-commercial positioning. Based on empirical analysis, there are three different ways that futures positioning can be used to forecast price trends in the foreign-exchange spot market: flips in positioning, extreme levels and changes in open interest. It is important to keep in mind, however, that techniques using these premises work better for some currencies than for others. Understanding and Trading the COT Report. The COT report can provide a window into what large institutional traders are doing. This is a great way to identify the trend.

Commodity traders have access to a special market report each week that provides a snapshot of the positions of large institutional traders and small speculators in each commodity futures category. This information is called the commitment of traders report or “COT report” and is provided by the Commodity Futures Trading Commission. Video Analysis: Behind the COT Report. The COT report is a great analytical tool for traders in any market because it provides up to date information about the trend and the strength of the commitment traders have towards that trend in each of the commodities markets. The COT report is also available on the most actively traded futures contracts such as stock indexes, interest rates and currencies.. The COT report essentially shows the net long or short positions for each available futures contract for three different types of traders. If traders are overwhelmingly long or increasing their long positions then we will have a bullish bias on that market. Similarly, if traders are short or increasing their short positions then we will have a bearish bias. Not all traders in the report are of equal importance. In fact, of the three types of traders, investors usually pay attention to the one type with requirements most like the individual trader. 1. Commercial Traders: These traders represent companies and institutions who use the futures market to offset risk in the cash or spot market. For example, a corn producer may short corn futures contracts to protect her profits if prices fall in the near term. This class of trader is not going to be very helpful for retail investors and we don’t pay much attention to them. 2. Non-Commercial Traders: This category includes large institutional investors, hedge funds and other entities that are trading in the futures market for investment and growth.

They are typically not involved directly in the production, distribution or management of the underlying commodities or assets. We pay the most attention to this category. 3. Non-Reporting Traders: This is the catch-all category for traders too small to be required to report their positions to the CFTC. We don’t know how many individual traders there are or what kind of investors they represent because they are non-reporting. Most market professionals assume that a major percentage of this category are individual speculators. They are notoriously bad traders and you will more often see this category betting against the trend than with it. We don’t pay any attention to this category. Knowing what the big traders (non-commercials) are doing through the COT report gives us some idea about the trend for a particular asset class. We can use these reports to see what the big money is doing in just about any asset class. There are COT reports for equity investors (stock futures), commodity traders (including oil and gold) and currency traders (very important for spot FX traders.

) The COT reports can be used to follow traders in the commodities and stock markets. The commitment of traders or “COT” report is useful but the raw data from the CFTC can be a little dense and confusing without some historical context. It is usually more helpful to be able to see changes within the information over time rather that just a single snapshot. Historical graphs of the COT report data can solve this problem very effectively. Video Analysis: Behind the COT Report – Part Two. You can find and examine the report by hand each week and construct a graph yourself for the commodities you are trading. The CFTC releases the data on Fridays but the report is current as of the Tuesday before each Friday’s release. The data is available from the CFTC’s website and is prominently featured right from the home page. If you want to track the COT data changes each week the numbers are contained within a long text file. You can see an example of what this looks like below with crude oil futures.

I have highlighted a few features that I have already talked about in the last section. 1. The non-commercial traders is the column you want to examine most closely. The commercial traders to the right are mostly hedging and will often be positioned in the opposite direction of the non-commercial investors or speculators. 2. As you can see there is a mild bias towards long positions in oil among the non-commercial traders. This is technically bullish but there are warning signs on the horizon. 3. The change in long or short positions can tell us a little bit about the trend in investor sentiment. Long positions have declined since last week and short positions have increased. This seems to indicate that there is some decline in bullish sentiment. COT Report for Crude Oil. The decline in bullish sentiment has been trending like that since mid-June before this particular image was taken. You can see the market’s reaction to declining investor bullishness in the chart of crude oil below.

As investor sentiment cools, traders may become more cautious about their risk exposure with tighter stops or protective options. Daily Price Chart for Crude Oil. As I mentioned above, the weekly data is useful but seeing the information within a chart to gather historical context can provide additional insight. There are several excellent, free sources for these kinds of charts on the internet. Alternatively you can compile your own version for the commodity contracts you want to see. The COT report shows how committed the large institutional “non-commercial” traders are to long or short positions within each currency pair. If traders are net short, the COT graph will show a negative position and if they are net long the COT graph will show a positive position. The COT charts also illustrates the rate of change within those long or short balances. In the video I will show you an example of the net position held by these large traders in the EURUSD at the time it was recorded. Currency COT charts are particularly useful as they can be used to infer sentiment in related markets. For example, a falling USDCAD is likely bullish for oil while a falling AUDUSD is probably bad for gold. If you are interested in doing some independent research on the COT report you can get it free from the CFTC’s website at cftc. gov. The COT report can be used in the same way that you might use a traditional technical indicator that only analyzes price and time. For example, we can apply filters to the report in order to understand not just whether traders are net long or short but whether they are becoming more or less bullish and bearish. That shift in investor sentiment can help predict the “flip” and can even be used to trigger a trade entry or exit. The chart below shows the COT report graph for the AUDUSD. You can see the flip from net long to net short on 9192008.

That is not much of a surprise considering price action at the time. You can see what was happening on the price chart below. The black line in the COT chart shows whether traders were net long or short but the red line further analyzes this data to show the rate of change in that net short bias. The AUDUSD COT report graph. Weekly Chart of AUDUSD covering the same period as the COT chart above. As you can see above, traders were net short but had been trending more towards bullishness than bearishness based on the red line which measures the rate of change of that sentiment. With this information you could assume that the underlying trend is down (based on the black line) but another flip could occur in the near term (based on the uptrending red line.) Building trading systems around this information or using it to define your own bias is relatively simple. Here are two example uses for this information. 1. Building a simple system from this information is relatively easy. For example, assume that you bought the currency pair every time the red sentiment line crossed above the mid point of the graph and reversed and shorted the currency pair when the sentiment line crossed below the mid point or neutral level of the graph.

That is a simple example but could be quite effective when combined with a diversification strategy and appropriate risk management. In the video that accompanies this article Wade Hansen, one of the editors here at Learning Markets, will illustrate a system like that and what kind of returns it has delivered in the past. 2. Both the sentiment line (red) and the net longshort line (black) are important trend indicators. Short term traders may use the sentiment line to define what kind of trades they are looking for (long or short) based on the direction or trend of the red line. Longer term traders may only select trades that conform to the net long or short position of the black line. These can be an easy way to define investor sentiment and to understand the strength (or weakness) of the underlying trend. The video in today’s article was a live presentation given by Wade Hansen in 2008. Wade developed the COT report graph including the calculations behind its sentiment line. He has tested the system in the live market and on past data and will share some of his findings in the presentation. The COT report is released each week after market close on Friday. Using the Commitment of Traders (COT) Report in Forex Trading. While the Commitment of Traders (COT) Report is not an exact timing indicator, it can aid in forex trading and provide a context for current and future market movements.

There are potentially many ways to use the COT Report for analyzing a forex pair. Here is one COT Report forex strategy, along with basics of what the COT report is, and why it is worth paying attention to. COT Report Basics for Forex Trading. Simply put, large traders and institutions must disclose their futures positions each Tuesday, which is called the “As of “date (currencies, or forex pairs, trade via futures market as well via the forex and cash markets). These positions are then revealed to the public each Friday, at 3:30 PM EST, in the COT report published by the Commodity Futures Trading Commission (CFTC). How these large traders and institutions are positioned gives insight into whether a trend is likely to continue or reverse. While the data only shows information on futures contracts, and not the transactions that occur in the forex market, the COT report is still a very good estimate of how other traders are positioned, and thus should be monitored by both currency futures traders and forex traders. Before going into COT Report forex strategies I want to briefly outline a few of the key elements. The COT Report has quite a bit of data, yet there is really only a few pieces of information I care about: the net position of Commercials, the net positions of Large Speculators, and how these positions have changed over time. Commercials are hedgers, businesses, producers, etc, who have large positions that are often offsetting another position or transaction.

Commercials include importers or exporters who are hedging foreign currency exposure to control costs or normalize income. As a group, these are counter trend traders. They can afford to hold positions against large trends because their transactions are often a hedge, and thus do not expose them to a direct loss. Think of a gold producer. They know they will be producing gold, and will need to sell it. They therefore sell gold futures to lock in a price that they can sell their gold at. If the price of gold goes up, they missed out on making more on their gold, but they still get to sell their gold at the price they locked in. If the price of gold goes down, they still get to sell at the price they locked in. The commercials are largely engaged in this type of trading. They do want to get a good price for whatever it is they are doing, but they are not typically speculating (although some may) on what the price will do, they are simply locking in prices (for commodities or currencies) to run their business. Large Speculators on the other hand are mostly hedge funds. Despite the name “hedge fund” these large speculators are rarely hedged, and therefore cannot sustain large losses or afford to trade against the trend. As a group Large Speculators are trend followers. Speculators are the people on the other side of the Commercial’s transactions. Since Large Speculators are trend followers and much more sensitive to price movements (they are speculating and are therefore more likely to experience a direct loss of funds if a trade goes opposite to what they expect) than the Commercials, Large Speculators are the group of prime interest and the group on which our COT Report forex strategies are based.

Calculating the net position over time “by hand” is possible as the reports are released weekly by the CFTC, but that is ultimately unnecessary. Using a COT Report chart is one of the easiest ways to track the data for trading purposes. COT Report data is chartable on barcharts. com. Select the futures contract you wish to view a chart of. The COT data is shown along the bottom of chart (we only care about the one that includes Large Spec., Small Spec, Comm Spec) The following is an example of a Euro (FX) futures chart showing the COT Report data along the bottom. The frequency of the chart is “weekly continuation” and the period is 5 years. (click to enlarge) In the chart above we can see the net positions of the Commercials (red) and Large Speculators (green). The chart shows that the speculators usually move with the price, and commercials against the price. When a line is below the “0” mark it means the net position is short, while above the “0” line means the net position is long. One other thing to note is that a currency future is relative to the US dollar. Therefore, the Euro future will move with the EURUSD. The Canadian dollar future will move with the CADUSD, which is inverse to the USDCAD forex pair most forex traders are used to. When the USD is the second currency in the pair, the future and the currency pair will move in unison. In currency pairs where the USD is first, the futures will move opposite the pair, such as the case with the CAD futures. Remember this when analyzing COT data and acting on it in the forex market. By visually seeing the COT data in this way we can extract useful information, which then provides the basis for our COT Report forex strategy.

COT Report Forex Trading – Extreme Levels Can Indicate a Reversal. When speculators are accumulating a position it can be a confirmation that there is interest in the trend. If shorts are being accumulated as the price drops, or if long positions are being accumulated as the price rises, this can be a good sign the trend will continue. But speculators have a limit–they can’t purchase or sell indefinitely. They may run out of money, simply wish to take profit (or losses) or may no longer feel as much conviction to keep buying at higher prices or selling at lower prices. When speculators are tapped out, want out or don’t want to invest anymore, there is nowhere left for the price to go, but to reverse. Therefore, the COT data can be used as a type of “overboughtoversold” indicator in terms of the health of the traders within the market. Each futures market will be a bit different, but critical COT levels will often repeat and indicate when speculators are overextended. The Euro futures chart above shows that when speculators were 200,000 contracts short, or close to it, this generally resulted in a price reversal to the upside over time these extreme levels may continue to push outwards.

It is not a single level that is important (200,000 contracts, for example) but rather watching for new extremes, and then reversals in price and COT direction after those extremes start to show up. This method is not recommended for a top or bottom picking strategy; it can be used to provide a context for other analysis and be used to confirm reversals in price though. Extreme levels can look easy to isolate in hindsight, but are not ideal timing indicators. That said, it is very useful for alerting traders when a reversal could be nearby. The COT data should not be acted on alone though; wait for price to confirm a potential reversal signal in the COT data (more on this later). Let’s look at another example, and see how the COT data could have aided in making a trading decision. The chart below shows Canadian dollar futures (D6), along with COT data. We can see that the Canadian dollar was in a long term decline versus the US dollar (futures contracts are traded against the USD, unless otherwise stated). In 2015, Large Specs had accumulated a short position close to -65,000 contracts. This only resulted in a minor bump up in price. In early 2016, the same short position resulted in a much larger up move. Of note is that this is when oil started to bounce, and the Canadian economy is heavily dependent on the price of oil. The rise in oil combined with an extreme reading on the Large Specs pointed to a move higher in the Canadian dollar. (click to enlarge) Ultimately though, we want price action to help confirm our trades. While those COT levels in 2015 and 2016 were more extreme than what we had seen in the past, it would have been relatively hard to make a trade based on them…

unless you were also looking at oil and making a determination that it was likely to turn higher, which would bolster the Canadian dollar in early 2016. With a few data points behind us for reference, the next major opportunity to use the COT came in 2017. But first a bit of context. In 2016 the price shot up, and the up move has larger than the last swing to the downside (Sept ’15 to Jan ’16). That is a very positive price action signal. It indicates that the downtrend may be over. But we want more evidence, which is why I usually wait for a pullback before taking trade (with most of my strategies). Throughout out 2016 and into 2017 we have a very lengthy and slow-moving decline. It is a much weaker down move than the prior up move. That’s another positive sign (read Price Action Trading with Velocity and Magnitude). Based on the price action, the stage is set. We have two compelling price action reasons to consider a long trade. In May, COT Large Spec short positions increase to well below the -65,000 point of interest. The position ultimately reaches -99,000 in late May. By mid-June that short position has decreased to below 90,000 and the position moves up toward zero every week after, showing that the Large Specs are quickly shifting their bias.

Price is also rising during this time. If we zero in on a daily chart we can see some possible trade locations. The first would been at the bottom of this weak descending channel. Remember, based on the price action we were expecting another move higher, and at this point the COT is at an extreme reading, confirming a move to the upside is likely coming. (click to enlarge) The price consolidates at the bottom of the channel, and then breaks above that consolidation, providing the first possible entry into a long trade (note that at this point, the Large Specs were still increasing their short position). For those who have read my Forex Strategies Guide, this would be a Front-Running trade. The price then rallies to the top of the channel, and consolidates. At this point the Large Specs are starting to buy (short position is moving back toward zero). So price and COT are confirming a move up. The price breaks higher out of the consolidation and the descending channel, signaling another possible trade. Since that time, the Large Specs have become bullish, flipping from short to long. This has helped fuel the rally, which is why we want to anticipate what these guys will do, and we do that by knowing that a big reversal is often coming when these these Large Spec positions are near extremes. The above chart is a futures chart though, not a forex chart. If you are trading the USDCAD, the same analysis would apply, but it would be flipped upside down. Remember, we were expecting the CAD to increase in 2017, based on price action and COT data.

If we expect the CAD to go up, what will the USDCAD do? It will fall, because if the CAD goes up, the USD goes down. The same trades and setups are present on the USDCAD chart, except we would have been going short the USDCAD (which is equivalent to going long the CADUSD or CAD futures). (click to enlarge) Trading With COT Extremes – Warnings. Have other pieces of evidence that help confirm a trade. It isn’t wise to just assume the price will reverse because the Large Specs are near a historically extreme level. Over time, these extreme levels tend to expand. In the CAD futures chart above, -99,000 was extreme. That may hold in the future as well, but several years down the road new extremes may be hit at 125,000 or 150,000. Positions can also stay near extreme levels for extended periods of time, without causing a price reversal. That is why we need other pieces of evidence. The extreme COT alerts us to a possible trade (or to avoid a trade) but it doesn’t SIGNAL a trade. This article is focused on COT, and how it can be used as an additional piece of evidence for taking trades.

The article did not discuss stop loss levels or profit targets (taking profits). These are elements of a trading strategy, and should be considered on each trade before placing it. COT data is not a strategy in and out of itself, rather it is just a tool that can be combined with a trading strategy and trading plan. IF THE COT IS NOT NEAR AN EXTREME, I DO NOT CONSIDER IT IN MY TRADING DECISIONS. I wouldn’t over-use this indicator. If you get a valid trade signal based on your strategies, and the COT data isn’t near an extreme, that doesn’t mean you shouldn’t take your trade signal. COT data is just an extra piece of data. If I get a valid trade signal, I take it. It’s just that occasionally COT may help in analyzing or confirming (or rejecting) trades. But as we can see from the CAD example, the COT data was only relevant (to how I trade) a few times over the last several years. It is still worth paying attention to, because when price action and extreme COT levels collide, it lets you know the likely direction of a major move. When looking at COT data, start with at least a 10 year chart for picking out extreme levels . Prior extreme long and short Long Spec positions are areas of interest, but remember these tend to expand outward over time. Make a note of these extreme levels, and then watch for trade signals as the price nears or exceeds these levels.

If you only look at extreme levels on a 1 or 2 year chart, you may be missing historically significant information. If we look at a CAD futures chart (with COT data) going back to 2007, we would see that 65,000 to 100,000 contract positions had been significant in the past as well. COT Report Forex Trading – Conclusion. One way I like to use COT data on my chart is to look for extremes in Large Spec. positions. While it isn’t an exact timing indicator, if other conditions align and I get a valid trade setup, an extreme level on the COT can often mean a sharp and large price reversal. Since we know that extreme COT levels often cause the price to move in the opposite direction of the recent trend, we gain insight into what direction we want to be trading before the reversal actually occurs. As COT levels reach extremes, it can also warn us to avoid trading in that trend direction, as it may be ripe for a reversal. Just because a COT reading is at or near an extreme doesn’t mean the price will have a massive reversal.

Sometimes we have positions stay at extreme levels for long periods of time, and the price continues to move in the trend direction without any major price reversals. This is why we don’t use the COT in isolation. We want to combine this approach with other technical or fundamental approaches, and ideally with specific price action strategies (that confirm when the price reversal may be starting). For other forex trading strategies, check out the Forex Trading Strategies Guide for Day and Swing Traders eBook, by Cory Mitchell. At over 300 pages, and including more than 20 strategies, it is more than an eBook…it’s a complete course on forex trading. By Cory Mitchell, CMT. Some other articles you may enjoy: High Probability Forex Engulfing Candle Trading Strategy – A trading strategy using engulfing candles as an entry point into a defined trend. Useful for noting the transition from pullback to trend. Provides an alternate entry method compared to the “traditional” approach. ABC Forex Trading Strategy – (Video) – A simple but powerful price pattern seen in all markets; it gets you in in the direction of strong momentum. How to Identify a Trend Change in Real-Time (video) – A look at how to monitor real-time changes in direction.


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