Trading Basics: Commitments of Traders (COT) Report

11/26/2015 6:00 am EST

Focus: STRATEGIES

Once a week, the Commodity Futures Trading Commission (CFTC) puts out the Commitments of Traders (COT) Report, a snapshot of the open interest for most futures contracts traded on US exchanges. The report is intended to provide investors with up-to-date information on the positions of traders for markets with 20 or more participants that are at or above the reporting levels established by the CFTC.

The report is available in either the short or long form. The short report shows the open interest for reportable, non-reportable, and reportable commercial positions. The short form also gives information on commercial and non-commercial holdings, spreaders, changes from the previous report, percentage of open interest by category, and the number of traders. The long report includes data for a particular crop year and shows the largest concentration of positions held by either the largest four or eight traders along with all the info found on the short form. 

There is a supplemental report, which will show the aggregate futures and options positions for non-commercial, commercial, and index traders for 12 agricultural commodities. Complexes covered are the agriculture (wheat, soybeans, corn, etc.), petroleum (crude oil, heating oil, etc.), natural gas and its products, electricity (coal, swaps, etc.), and the metals (gold, silver, copper, etc.).

Although precursors to the COT can be traced all the back to 1924, the official COT started in 1962, and it was a monthly report back then. The report gives investors relevant information on who is buying and selling, as well as transparency on market activities. There are reports for both futures only, as well as for futures and options. Anyone is able to receive the reports, and they are always available on the CFTC's Web site.

There are basically two types of market participants in futures: hedgers and speculators. The COT breaks down these participants into three categories: non-reportable, reportable, and reportable commercials. Non-reportable includes small speculators (individual investors) and small commercials (small hedgers). Reportable positions include large speculators, which would be CTAs, index funds, money managers, and institutional investors. Reportable commercials would be large hedgers.

Many traders consider the "smart money" to be the large commercials and the large speculators. Whether or not they are the smart money is debatable, but what isn't debatable is the fact that these groups have the most money, and therefore, a larger impact on the markets. One thing to note is that large commercials are mostly hedgers, so they can have dual positions, one in the futures markets and one in the physical market. With this being the case, large commercials can stay in losing futures positions longer because they will be winning in the physical market.

Blindly following the large traders will not always work since they have deeper pockets than most retail traders. What is important to note is the change in positions on a weekly basis. Being able to see the trend of large traders will give you an idea of what the market may be doing in the future as well as why it did what it did the week before. Conversely, many traders like to look at what small speculators are doing-since so many of them lose money-and do the opposite.

The COT gives investors insights as to what all market participants are doing on a weekly basis. One can't just blindly follow the large speculators and expect to be profitable, but it does give you an idea of what the big money is doing. Any time positions get to a historically large net long or net short, one can expect changes in that market's trend. As you can see, paying attention to the COT Report gives a basic snapshot of market activities.

By the Staff at TradingLesson.com

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