FX Trading: How to use the Commitment of Traders Report
Due to current legal and regulatory requirements, United States citizens or residents are currently unable to open a trading business with us. Your ability to open a trading business with Day Trade the World™ or join one of our trading businesses is subject to the laws commitment of traders forex and regulations in force in your jurisdiction. For instance, if a sudden interest rate decision is made, the fact is that the market will react suddenly and many people will lose money. On the other hand, in early November 2009, the net long positions hit an extreme.
As one would expect, the largest positions are held by commercial traders that actually provide a commodity or instrument to the market or have bought a contract to take delivery of it. Thus, as a general rule, more than half the open interest in most of these markets is held by commercial traders. There is also participation in these markets by speculators that are not able to deliver on the contract or that have no need for the underlying commodity or instrument. They are buying or selling only to speculate that they will exit their position at a profit, and plan to close their long or short position before the contract becomes due. In most of these markets the majority of the open interest in these “speculator” positions are held by traders whose positions are large enough to meet reporting requirements.
Technically, they are enterprises that have a currency position that is incidental to their core business. You want to sell the pesos in the futures market as soon as you know the size of the order in order to protect your revenue stream. In fact, you probably consulted the futures price for the payment date before you priced the product in pesos to the importer. By the time you have placed your peso sell order, you no longer care where the peso goes. If it goes down, you are protected by your fixed price already secured with your futures sale. Commercials are not trying to make money from trading currencies — they are making money buying and selling widgets.
- There is no magical indicator that will tell us where the market is headed; however, using different types of indicators that are independent from each other can help a trader make a more informed decision.
- In general, the large speculator category represents fund traders and professional traders who carry large positions.
- This is because, if everyone is long a currency or a commodity, who is left to short?
The COT report has been a valuable tool for traders for many years and continues to be relevant in today’s financial markets. However, as technology continues to evolve, the way in which the report is produced and used is also changing. Finally, the guidelines and criteria used to categorize traders are not entirely transparent.
While the position data is supplied by reporting firms, the actual trader category or classification is based on the predominant business purpose self-reported by traders on the CFTC. The disaggregated COT report is another one that is commonly known by traders. It provides a deeper breakdown of the market participants, splitting commercial traders into producers, merchants, processors, users, and swap dealers. The noncommercial participants are split between managed money and other reportables. For example, traders are classified as non-commercial or commercial, and that holds for every position they have within that particular commodity.
This means that an oil company with a small hedge and a much larger speculative trade on crude will have both positions show up in the commercial category. Simply put, even the disaggregated data is too aggregated to be said to accurately represent the market. Many speculative traders use the Commitments of Traders report to help them decide whether or not to take a long or short position. One theory is that “small speculators” are generally wrong and that the best position is contrary to the net non-reportable position. Another theory is that commercial traders understand their market the best and taking their position has a better chance of profit (which is pretty much the same thing as the “small speculators” being wrong).
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There is a lot to learn about the COT report but what’s often helpful is to find where there is a strong divergence between large speculators and large commercials. There are many different ways to analyze the reports, but for the most part, https://g-markets.net/ the large traders’ net position and “change in position” over a two week period are the most important numbers to watch. In general, the large speculator category represents fund traders and professional traders who carry large positions.
The limitations and challenges of using the Commitment of Traders Report in trading
Looking at the COT example in the table above, we can see that Nasdaq 100 futures, traded on the Chicago Mercantile Exchange (CME) had an open interest of 57,779 contracts on June 15, 2021. Of these, 14,320 were longs held by dealers and 10,875 shorts sold by institutional traders. The COT Public Reporting Environment (PRE) provides an application programming interface (API) to allow users to customize their experience with the COT market report data. The API allows users to search and filter across columns for each of the datasets, including reporting date or week, commodity groups, subgroups, or name, and contract market name.
Understanding CFTC Terms
Their sentiments are never all that essential to the market meaning that they can’t move the market. In COT, hedgers, who are also known as the commercial traders’ intention is to shield themselves against a sudden unexpected price movement on an asset (including those caused by exceptional events). In conclusion, it is important to note that the sentiments from the non-commercial traders will not always be correct. As we all know, financial markets are highly correlated, and the COT report can sometimes provide insights from other markets different from the one we are trading in. In this example, we will use gold futures COT and compare it to EUR/USD prices. The 252-day correlation currently stands at 0.58, although not very high but still meaningful.
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With these general definitions in mind, traders can then decide how to use this information. The image below depicts an extract from the COT report with the three main groups as outlined above. These contracts, sold in lot sizes that vary by currency, net out to have either a surplus of buy requests (positive values in the chart) or sell requests (negative values). Traditional trading lore has it that the way to use COT data is to “follow the commercials.” In FX, this is not always the best advice.
To help you analyze important trends and movements using the Commitment of Traders reports, Tradingster.com provides up-to-date COT reports (including COT reports’ historical data) and free COT charts. The market will be in a weakened bullish set-up “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. Despite the different levels of sophistication and market impact, both institutional and retail traders play an important role in the COT report. It is important to keep in mind that the COT report is a historical snapshot and provides data on the previous week’s market activity, so you should not use it alone in making trading decisions.
At times, the majority of the traders might be wrong while at other times, they might be correct. Many traders and analysts use this tool and have developed custom indicators driven by COT. Keep in mind that the small trader’s net position is usually vulnerable to either long liquidation or short-covering if the market starts to move against them. The number “non-reportable” positions are derived from subtracting the number of large spec and commercial positions from the total open interest.
For example, if you see a bullish setup (say a hammer pattern at a support level) on the price chart, you may look for a growing net long position among commercial traders to confirm your bullish bias. On the other hand, traders should be aware that the COT report is a lagging indicator, as it is based on data from the previous week. This means that it may not always provide the most up-to-date information on market sentiment. As a result, traders should use the COT report in conjunction with other market data, such as price action and technical indicators, to get a more complete picture of the market. One of the key ways to interpret the COT report is to look at the changes in the net positions held by commercial and non-commercial traders.
