FX Trading: How to use the Commitment of Traders Report
The legacy COT simply shows the market for a commodity broken into long, short, and spread positions for non-commercial traders, commercial traders, and non-reportable positions (small traders). These are typically hedge funds and various types of money managers, including registered commodity trading advisors (CTAs); registered commodity pool operators (CPOs) or unregistered funds identified by CFTC. The strategies may involve taking outright positions or arbitrage within and across markets. The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients. 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.
Types of COT Reports
This report shows a breakdown of open interest positions in three different categories. 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. 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.
Reports Dated April 23, 2024 – Current Disaggregated Reports:
In general, the large speculator category represents fund traders and professional traders who carry large positions. The Commitments of Traders (COT) reports can sometimes give traders a good idea of future significant moves in the market. The CFTC then corrects and verifies the data for release by Friday afternoon. The Barchart site’s data is then updated, after the official CFTC release.
THE DISAGGREGATED COMMITMENT OF TRADERS (DISAGGREGATED COT) REPORT
The remaining three categories (« asset manager/institutional; » « leveraged funds; » and « other reportables ») represent the buy-side participants. These are essentially clients of the sell-side participants who use the markets to invest, hedge, manage risk, speculate or change the term structure or duration of their assets. The category called « dealer/intermediary, » for instance, represents sell-side participants. The COT reports provide a breakdown of each Tuesday’s open interest for futures and options on futures markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In this case, traders can see what market participants in other markets are doing and compare it to the instrument they are trading using intermarket analysis techniques.
Likewise, short-call and long-put open interest are converted to short futures-equivalent open interest. For example, a trader holding a long put position of 500 contracts with a delta factor of 0.50 is considered to be holding a short futures-equivalent position of 250 contracts. A trader’s long and short futures-equivalent positions are added to the trader’s long and short futures positions to give « combined-long » and « combined-short » positions.
As always, all trading tools are vulnerable to criticism and can be scrutinized. Read on as we can summarize some of the main advantages and disadvantages of using the COT report as a trading tool. Each Friday, the CFTC (US Commodity Futures Trading Commission) reports the COT (Commitment of Traders) report. Remember, since spot forex is traded over-the-counter (OTC), transactions do not pass through a centralized exchange like the Chicago Mercantile Exchange. By watching the behavior of these players, you’ll be able to foresee incoming changes in market sentiment.
This is where COT stands out, as it relies on a different type of data that doesn’t take prices into account; the data is simply driven from the total number of open positions and has nothing to do with instrument pricing. As a result, a classic bullish set-up for a given market would be when large traders are net long and small traders are net short. 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. These are institutional investors, including pension funds, endowments, insurance companies, mutual funds and those portfolio/investment managers whose clients are predominantly institutional.
Traders follow the COT report to identify extreme levels of long or short positions in a currency, which may signal a trend reversal. This report shows the changes in open positions of futures traders, including commercials, small speculators, and large speculators. Forex traders may use currency derivatives COT reports to find large net long or net short positions. The report provides investors with up-to-date information on futures market operations and increases the transparency of these complex exchanges.
Open interest, as reported to the Commission and as used in the COT report, does not include open futures contracts against which notices of deliveries have been stopped by a trader or issued by the clearing organization of an exchange. In many cases, traders can identify the strength of a specific trend and use it as a confirmation tool through changes in position levels for different market participants. For example, in an ideal world, we can expect that if the price is rising, large speculators are buying while commercials are selling, and we can consider it a representation of a healthy trend. On the other hand, a divergence between the above can signal the opposite. The Commitment of Traders (COT) reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. It breaks down the open-interest positions of all major contracts that have more than 20 traders.
The report includes data such as open position data changes, volume, and open interest changes for outright futures contracts and options on futures. The report is released in different formats and provides extensive information on historical position changes, which some traders use as part of their trading arsenal. We will focus here on the three main categories; however, there is more data and other categories available on the COT report. COT reports are based on position data supplied by reporting firms (FCMs, clearing members, foreign brokers, and exchanges).
Of these, 14,320 were longs held by dealers and 10,875 shorts sold by institutional traders. The long version of a COT report, in addition to the information in the short report, groups the data by crop year, where appropriate, and shows the concentration of positions held by the largest four and eight traders. Traders can use the report to help them determine which positions they should take in their trades, whether that’s a short or a long position. One thing the report does not do is categorize individual traders’ positions because of legal restraints. This is part of confidential business practices, according to the commission.
Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and is not suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. The chart below is for Euro futures with its COT data applied; the blue line on the price chart shows prices making higher highs while large speculator positions are making lower highs. We can also see commercials positioning for higher prices, which is the opposite of what to expect.
These figures are not netted, but instead show overall volume (that is, interest). Speculators are not able to deliver on contracts and have no need for the underlying commodity or instrument, but buy or sell with the intention of closing their “sell” or “buy” position at a profit, before the contract becomes due. We commitment of traders report forex introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. In early October 2009, EUR futures net long positions hit an extreme of 51,000 before reversing.
Open interest held or controlled by a trader is referred to as that trader’s position. For the COT Futures-and-Options-Combined report, option open interest and traders’ option positions are computed on a futures-equivalent basis using delta factors supplied by the exchanges. Long-call and short-put open interest are converted to long futures-equivalent open interest.
It is important to remember that correlations change over time; however, since the Euro, British Pound, and Gold are all priced in USD, the correlation is expected to remain close to its averages unless a major change happens. The Legacy and Disaggregated reports are available in both a short and long format. 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). 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. This article is for general information purposes only, not to be considered a recommendation or financial advice.
The Commitment of Traders Report is a breakdown of each Tuesday’s open interest in the major futures markets as reported by the US Commodity Futures Trading Commission (CFTC). Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and may not be suitable for everyone. Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses.
Information that is included in the report is compiled on Tuesday and verified on Wednesday before being released every Friday. The report is intended to help people understand the dynamics of the market. Commodity Futures Trading Commission, « each Tuesday’s open interest for futures and options on futures markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. » The COT reports are based on position data supplied by reporting firms (FCMs, clearing members, foreign brokers and exchanges). 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 Form 40 and is subject to review by CFTC staff for reasonableness.
- This category of traders are usually trend followers and, in some cases, can also be considered a well-informed group.
- Of these, 14,320 were longs held by dealers and 10,875 shorts sold by institutional traders.
- 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.
- 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 reports are read as tables, which each row and column labeled appropriately (see the example above). The information in the report indicates how much interest there is, both long and short, in various derivatives contracts, and which type of market actor is involved. This is meant to provide a clearer picture of what the people with skin in the game—the users of the actuals—think about the market versus the people with profit motivations or speculators. The disaggregated COT report is, in part, a response to some of the criticism of the legacy COT.
Looking at forex trading, the chart below shows GBP/USD with its COT net positions applied. The focus here is on the position levels when it reaches its all-time extreme and the price action development afterwards. We can see that historical extreme positioning levels represented historical price turning points. Market participants also look for divergences between different categories to identify potential short- or long-term reversals. The supplemental report is the one that outlines 13 specific agricultural commodity contracts.
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. The fact that COT report data is independent of price action makes it a different type of indicator when compared to the many and mostly used ones, and therefore it may add value to a trading plan. The legacy COT report separates reportable traders only into « commercial » and « non-commercial » categories. The long report, in addition to the information in the short report, groups the data by crop year, where appropriate, and shows the concentration of positions held by the largest four and eight traders. Due to legal restraints (CEA Section 8 data and confidential business practices), the CFTC does not publish information on how individual traders are classified in the COT reports. 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.
It is a core data source for traders and for most academic research on pricing trends in the futures market. That said, it does have its critics and their issues with the report are justified. The biggest weakness with the COT is that, for a document meant to promote transparency, the rules governing it are not transparent. Department of Agriculture’s Grain Futures Administration issued an annual report outlining hedging and speculation activities in the futures market. In the 1990s, the report moved to a bi-weekly publication before going weekly in 2000. One way to use the COT report in your trading is to find extreme net long or net short positions.
The aggregate of all traders’ positions reported to the Commission usually represents 70 to 90 percent of the total open interest in any given market. From time to time, the Commission will raise or lower the reporting levels in specific markets to strike a balance between collecting sufficient information to oversee the markets and minimizing the reporting burden on the futures industry. The category called « dealer/intermediary, » for instance, represents sellside participants. Typically, these are dealers and intermediaries that earn commissions on selling financial products, capturing bid/offer spreads and otherwise accommodating clients.
The Commodity Futures Trading Commission (Commission or CFTC) publishes the Commitments of Traders (COT) reports to help the public understand market dynamics. Specifically, the COT reports provide a breakdown of each Tuesday’s open interest for futures and options on futures markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. The CFTC releases the weekly COT reports in static format to support the historical usage patterns of industry professionals viewing and accessing each week’s data. Each historical report is viewable with the data for the respective reporting week, along with all historical data compressed within an annual file. In October 2022, CFTC began publishing weekly and historical report data within a public reporting environment to support industry professionals needing to customize, search, filter, and download report data for analysis and trends. Commercials are traders who are primarily involved in trading a specific commodity or a financial instrument due to the nature of their business.
Different types of traders and businesses utilize the futures market to hedge their risk or lock in a specific market price. Examples of commercials or hedgers can be a crop producer looking to hedge the risk of any potential decline in price in the future; an airline looking to take advantage of or lock in a low price on oil is also another example. Since commercials are hedging, their positions are usually against the market. This means that if prices are rising, commercial traders are expected to be selling, and if prices are declining, commercial traders are expected to be buying.
The CFTC requires large speculators and commercial traders, or hedgers, to report their net positions twice each month. Forex commitment of traders reports are based on the corresponding futures contracts traded on the Chicago Mercantile Exchange. The COT provides an overview of what the key market participants think and helps determine the likelihood of a trend continuing or coming to an end. If commercial and non-commercial long positions are both growing, for example, that is a bullish signal for the price of the underlying commodity.
When graphically shown on charts, you actually see what is referred to as the Net Traders Positions which is the actual difference between the number of long positions held by each group minus the number of short positions. Thus a positive number means they hold more long positions than short and vice versa. The long and short open interest shown as « Nonreportable Positions » is derived by subtracting total long and short « Reportable Positions » from the total open interest. Accordingly, for « Nonreportable Positions, » the number of traders involved and the commercial/non-commercial classification of each trader are unknown. It is also worth noting that the only trader category that was supporting and following the price action were the small speculators. One of the main problems that traders face when using various trading tools is that many indicators are based on price data, and therefore, in many cases, the different indicators end up duplicating the same message.
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Many traders and analysts use this tool and have developed custom indicators driven by COT.
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. As a quick reminder and as mentioned earlier, as markets grow and more participants enter the markets, extreme positioning levels can be broken and new all-time levels are created. A « money manager, » for the purpose of this report, is a registered commodity trading advisor (CTA); a registered commodity pool operator (CPO); or an unregistered fund identified by CFTC. These traders are engaged in managing and conducting organized futures trading on behalf of clients.
CFTC staff does not know specific reasons for traders’ positions and hence this information does not factor in determining trader classifications. Note that traders are able to report business purpose by commodity and, therefore, can have different classifications in the COT reports for different commodities. For one of the reports, Traders in Financial Futures, traders are classified in the same category for all commodities. Clearing members, futures commission merchants, and foreign brokers (collectively called reporting firms) file daily reports with the Commission. Those reports show the futures and option positions of traders that hold positions above specific reporting levels set by CFTC regulations.