Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
How to Use the Commitment of Traders (COT) Report
09/04/2009 12:01 am EST
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 than just a single snapshot. Historical graphs of the COT report data can solve this problem very effectively.
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 Web site 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 using crude oil futures. I’ve highlighted a few key features below:
1. The non-commercial traders column is the one 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.
Besides hard commodities, the COT reports from the CFTC include data for financial, currency, and interest rate futures. If you are a currency trader, you can find historical charts for net long or short positions and the rate of change of those traders at LearningMarkets.com within the Forex tab.
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 negative position. The COT charts also illustrate 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 EUR/USD at the time it was recorded. Currency COT charts are particularly useful because they can be used to infer sentiment in related markets. For example, a falling USD/CAD is likely bullish for oil, while a falling AUD/USD 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 Web site at www.cftc.gov.
For more information, watch the video below:
By John Jagerson of LearningMarkets.com.
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