How To Trade the Commitment of Traders (COT) Report

04/11/2014 7:00 am EST

Focus: STRATEGIES

Andy Waldock

Founder, Commodity & Derivative Advisors

Andy Waldock of Commodity & Derivative Advisors explains the inner workings of this crucially important news release and what traders should be watching.

There are several sayings intended to keep us on the right path in this day of data crunching, quantitative analysis, backtesting, and the never-ending search for the best new method, perhaps none is more true than, "Success breeds success."

When I first began my trading career in Chicago, I didn't spend much time with new traders. Partly because many didn't last long enough to get to know their last name, and partly because I was married with a young child and a lot of bills to pay. I did spend time with as many of the grizzled veterans and established traders as I could.

Early on, after what had been one of my worst days, I was full of self-doubt, and felt the pressure of the world on my shoulders. I sat in the member's breakroom, just off the S&P 500 trading pit, with my head in my hands and an untouched cup of coffee in front of me.

I heard a chair slide out at my table and a graveled voice of experience ask, "You bust out kid?" I looked up to see Bill Katz, who had been a member since the blackboard trading days on Franklin Street. I replied that I hadn't, but his point was that as long as you get to come back tomorrow, you're still doing something right.

The point of this story is that many people ask me questions about why I follow the weekly Commitment of Traders Report (COT), what group I follow within the report, and why. The month of November has been a great illustration across multiple market sectors. This week, I'd like to explain how it all plays out.

The Commodity Trading Futures Commission (CFTC) tabulates the weekly Commitment of Traders Report based on the trading of several individual groups of traders. Over the last couple of years, in the interest of "transparency," the groups have been broken into several subsets as well. For our purpose, we can break it down into the following main categories.

  • Large Speculators: Any trader with an interest greater than the CFTC's reporting level in any individual market.
  • Small Speculators: All individual traders with an interest less than the CFTC's reporting level in any individual market.
  • Non-Commercials: Any organization trading in commodity futures with substantial reporting interest not tied directly to the production or consumption of the markets that they hold reportable positions in. These include Commodity Index Traders, ETF managers, and swap dealers.
  • Commercial Traders: Producers or consumers of commodities. These are the true hedgers in the commodity markets. These hedges can be directly tied to gold, corn, and oil just as easily as bonds, currencies, and stock indexes.

Following the commercial traders is, "Success breeding success." This group of traders has a fundamental understanding of value either through the production of or the end line consumption of the commodity market in question.

These people make the calls on when to stock up on raw materials for future consumption, or when to sell forward production and base their livelihoods on their ability to ascertain value. Furthermore, in the case of publicly traded companies like British Petroleum (BP), ConAgra (CAG) or General Mills (GIS), their research entreats themselves to the good graces of their shareholders and board members.

Andy Waldock, Founder, Commodity & Derivative Advisors

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