The Commitment of Traders Report (COT) can give you key insights into the market. Learn how to use it to make money-making trades from veteran trader John Person.

The Commitment of Traders Report comes out every Friday, once a week.  There are several different components of that.  You can look at futures only.  You can look at futures and options combined.  How I use the information is very simple.  I like to look at it as a contrarian or as a consensus indicator. I want to see whose hands the market is in, number one. 

Number two, the report breaks down three different categories: the commercials, hedge funds, and small speculators.  So the first thing I like to look at is what is the percent of net positions to the overall open interest, because from time to time throughout the year we see a contraction of market participation.  So we may see open interest, let’s say the E-mini S&Ps go to maybe 2.5 million contracts in a given week or open positions or as high as 3.5 million.  So if you have a number of the small speculators say net long $200,000, but if they’re only long $200,000 of a 2 million open interest, that’s 10%.  Versus if they’re long $200,000 of a 1 million open interest.  So as you can see, that’s 20%.  So the higher percent one group is net long or net short, that’s one way that I use the information.  It’s that percent to open interest figure, that’s number one. 

Number three, another way I use the Commitment of Traders Report is that if small speculators are heavily involved in a market.  Small speculators, for the most part, aren’t trading bonds.  They’re not trading corn or wheat, and they’re not trading live cattle or feeder cattle. And for the most part, they’re not really active in gold for longer-term position trading, and they’re certainly not sellers if they are participating in gold for longer-term positions.  Small speculators—another great example is that they’re probably not taking big positions in copper, for example.  So I like to eliminate looking at the small speculator in those categories, and I focus on more of what the commercials are doing.

Everyone has a different opinion on how they use the information.  How I use the information is I like to look at like the S&P 500 Futures.  We realize that small speculators are not position trading the big S&P. So therefore, I’m not really looking at the big S&P data.  I’m looking at the E-mini S&P data.  That’s where more small speculators are. 

If it’s presumed that 80% of small speculators lose, I want to see what side of the market they’re on. If commercials are net short, if hedge funds are net short, but small speculators are net long—which is a great example, because in April and into early May 2012, for example, as the market was making newer highs, commercials were adding to short positions, hedge funds were short. It was the small speculators who were amassing a net long position—approximately 15% of the overall net open interest—so they had a huge net long position. 

So seasonally we have a weak time period.  Commitment of Traders Report reflects that the market was in the hands of small speculators.  It gave us a clue, with other indicators that we’re looking at, that we were looking for a major price decline or correction coming into the market.

I also want to look at the institutional traders for most of the trades, but I want to look at—and the logic behind of when you look at small speculators, if small speculators are not participating in the market, don’t follow them in that particular market.  But if there is a huge conglomerate of small speculation participation in a market, then start to look to see where the balance of the positions are. 

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