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- COT report
- Current Legacy Report / Short Format / Chicago Mercantile Exchange:Futures Only
- Find (CTRL+F): NZD, AUD, JPY, CHF, GBP, EUR, USD, CAD
- Commercial: These are the big businesses that use currency futures to hedge and protect themselves from too much exchange rate fluctuation.
- Non-Commercial: This is a mixture of individual traders, hedge funds, and financial institutions. For the most part, these are traders who looking to trade for speculative gains. In other words, these are traders just like you who are in it for the Benjamins!
- Long: Thats the number of long contracts reported to the CFTC.
- Short: Thats the number of short contracts reported to the CFTC.
- Open interest: This column represents the number of contracts out there that have not been exercised or delivered.
- Number of traders: This is the total number of traders who are required to report positions to the CFTC.
- Number of traders: The number of options and futures positions that are required to be reported according to CFTC regulations.
- Reportable positions: The number of options and futures positions that are required to be reported according to CFTC regulations.
- Non-reportable positions: The number of open interest positions that do not meet the reportable requirements of the CFTC like retail traders.
- (1) Commercial traders (Hedgers)
- Hedgers or commercial traders are those who want to protect themselves against unexpected price movements.
- They are most bullish at market bottoms and most bearish at market tops.
- Hedgers, are not interested in making profits from trading activities.
- (2) Non-commercial traders (Large Speculators)
- Large speculators are in it for the money and have no interest in owning the underlying asset!
- Many speculators are known as hardcore trend followers since they buy when the market is on an uptrend and sell when the market is on a downtrend.
- They keep adding to their position until the price movement reverses.
- Large speculators are also big players in the futures market since they hold huge accounts.
- As a result, their trading activities can cause the market to move dramatically.
- They usually follow moving averages and hold their positions until the trend changes.
- (3) Retail traders (Small Speculators)
- They own smaller retail accounts. These comprise of hedge funds and individual traders.
- They are known to be anti-trend and are usually on the wrong side of the market. Because of that, they are typically less successful than hedgers and commercial traders.
- However, when they do follow the trend, they tend to be highly concentrated at market tops or bottoms.
Tops and Bottoms With the COT Report:
- The ideal places to go long and short are those times when sentiment is at an extreme.
- The speculators and commercials gave opposite signals.
- While hedgers buy when the market is bottoming, speculators sell as the price moves down.
- Hedgers are bearish when the market moves to the top while speculators are bullish when the price is climbing.
- If hedgers keep increasing their long positions while speculators increase their short positions, a market bottom could be in sight.
- If hedgers keep adding more short positions while speculators keep adding more long positions, a market top could occur.
- Speculators, because they follow the trend, catch most of the move BUT are wrong on turning points.
- Commercial traders, on the other hand, miss most of the trend EXCEPT when price reverses.
- Until a sentiment extreme occurs, it would be best to go with the speculators.
- Speculative positioning indicates trend direction while commercial positioning could signal reversals.
- The basic rule is this: every market top or bottom is accompanied by a sentiment extreme, but not every sentiment extreme results in a market top or bottom.
- traders have not been able to transfer over to currencies is volume-based trading. 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,
- 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.
- In using the COT report, commercial positioning is less relevant than noncommercial positioning:
- A) 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.
- B) Noncommercial data, on the other hand, is more reliable as it captures traders' positions in a specific market.
Three COT Steategies
- (1) the net position of Commercials.
- (2) the net positions of Large Speculators.
- hedgers who have large positions which are 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 transaction are a hedge, thus do not expose the holder to a direct loss. *
- Large Speculators:
- 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.
- Since Large Speculators are trend followers and much more sensitive to price movements than the Commercials.
- Large Speculators are the group of prime interest and the group on which the COT Report forex strategies are based.
- (1) Speculators usually move with the price, and commercials against the price.
- (2) When a line is below the “0” market it means the net position is short, while above the “0” line means the net position is long.
- (3) The currency future is relative to the US dollar. Therefore, the Euro future will move with the EUR/USD. The Canadian dollar future will move with the CAD/USD, which is inverse to the USD/CAD. 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.
(1) COT Report Forex Trading – Speculators are Trend Followers
- Speculators drive trends. Therefore, use the interest of speculators as a confirmation tool for trends. If the Euro is moving higher and speculators are increasing their long position this means big traders are pushing the market in your favor if you are long the EURUSD. Trade with the big boys, and follow the trend. Don’t get too greedy though, because if all the speculators are long, then there is no one left to keep pushing the trend.
(2) 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. 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 “overbought/oversold” indicator.
- Not in terms of price and arbitrary levels like most overbought and oversold indicators, but in terms of the health of traders within the market.
- 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.
(3) COT Report Forex Trading – Watch For Speculators to Flip Their Position
- If speculators are net short and that short position continually decreases until eventually it crosses above zero, a new trend is quite possibly underway.
- The movement from net short to net long or vice versa signals a change in sentiment and that a new trend is emerging or has already begun.
- Using the logic of our first method of following the speculator trend (when it aligns with price) this shift represents a potential trading opportunity
- Exiting positions can be done when the price breaks the trends, when speculation reaches extreme levels or when speculative demand begins to wane.