Cot - Report in application to the Forex
In commodities futures trading, the Commnts of Traders (COT) report is the only source of insight into the market rankings of the major players. The COT report provides 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.The CFTC classifies traders into three groups: commercial traders, non-commercial traders (big speculators), and small traders (small speculators). All of a dealer's reported futures positions in a commodity are classified as commercial if the trader uses these contracts for hedging.
COMMERCIALS
Dealers get classified as commercial by filing a statement with the CFTC which they're commercially ”engaged in business activities hedged by the use of the futures or option markets.”
Commercial hedgers are institutions and individuals who function at the cash market of the underlying commodity. Examples include companies that are global farmers, miners, and chips. When prices are high, the commercials market their stocks earnings by selling stocks to minimize risk. If prices fall, their futures positions will protect them.
Commercials are considered to be the most powerful group in the commodities markets, since they have analysts and sources of intelligence that examine a number of factors. Even though you'll never understand what information they have at their disposal, by analyzing the COT data, you can see exactly what positions they choose. This is the point in all of this.
These ”Big Dogs” are well worth paying attention to -- particularly at extreme rankings, because their purchasing or selling strength can move the markets. They're just like a herd of elephants stomping a river bank along. You can not overlook their foot prints .
NON-COMMERCIALS (OR LARGE SPECULATORS)
The non-commercials, or ”big speculators,” take on risk in return for the opportunity to profit. They're speculative traders, who are generally classified as finance managers. These are trend followers, and as such aren't terribly accurate most of the time - although not all the time.
SMALL SPECULATORS
This class comprises all speculators with rankings below reportable limits, according to the CFTC, and small hedgers.
SPREADING
Non-commercial rankings also include spreading. Commercial traders aren't perceived as spread traders, because they're hedging against an actual commodity. The small traders could have a spread as a position, but their unique positions aren't reported since spreading within this group is relatively small.
COT: THE BIG DEAL
When assessing historic stock prices, we are confined to five factors -- i.e., the introductory cost, high, low, closing cost, and quantity at a time series (hourly, daily, weekly, etc.) The exact same holds true for futures, with the exception that there's also the part of open interest, which is the total of all open or futures contracts entered into - not offset by a delivery, exercise, or trade. The aggregate of all long open interest is equivalent to the aggregate of all short open interest rates. Open interest held or controlled by a dealer is referred to as that dealer's position.
As traders apply the many different indiors accessible to them, such as Bollinger Bands, RSI, Stochastic, etc., they are simply manipulating the exact same underlying data in a bid to make trading decisions. While the number of these manipulations is unlimited, the dataset itself is finite, never actually having the ability to show any new, or more meaningful details. For futures trading, on the other hand, the COT reports provide independent and additional datasets for evaluation.
The COT information is independent of cost data, as COT data isn't derived from cost data. As such, the COT metrics require on a completely new level of importance.
The COT reports contain a multitude of raw numbers, far too many for the average person to understand. It's just a maze of data, which in and of itself is horribly difficult to read and comprehend.
To simplify the process of knowing what all of the numbers actually mean, we have created a segment on this website called Weekly COT Data. Click on http://www.forextradersworld.com/mod...order=0thold=0 to get COT Charts.
Here you see commercial, non-commercial, and non-reportable positions nicely portrayed in graphical form. Each of of the arithmetic is done for you. To put it differently, each respective line above is net of short and long positions for ease of reference. If all places were summed together, you'd have a straight line, because they would neutralize each other in complete.
Spreads aren't included in the COT graph as they're neutral (one spread = 1 and one short contract). The total extended positions will equal the total short positions for all 3 groups.
RULES
There are no hard and fast rules when it comes to interpreting the effect any one set has on the futures markets. However, it's usually accepted that the commercials, or even the ”Big Dogs,” deserve the most respect. They're assumed to be the most successful, albeit there are times when the big speculators will signify the strength of their devotion as greater than the other two groups. The small traders are often regarded as the ”dumb money,” the group to stay away from -- the example of what not to do in futures trading.
THE BIG CLUE
In the graph, you will notice that the comm. Index along with the spec index are at odds with each other. What's telling you is that, with such intense divergence of view or ”belief,” the inherent tradable is going to undergo a reversal of price management -- i.e., up. That's because the commercials are heavily extended, and at a 100 reading, versus the 0 reading to the other hand. Here is actually the extremity you should always be searching for before choosing your position in the industry.
The only exception to this ”rule” is where you see ”backwardation,” or ”premium” This means that the front month is priced higher than the back month, and what this means is that the commercials really want the inherent merchandise. I found this happen lately with US dollar index.
Word of warning ... never short a currency where the ”Big Dogs” are extremely short, but there's a premium on the front month. The ”Big Dogs” are having their cake and eating it too. Don't you get eaten alive in the process. After the premium begins to fade and disappears, as well as the ”Big Dogs” are still heavily short, then you can safely short the currency.
The most important facet of the C.O.T. account for most traders is the change in net ranks of the commercial hedgers. Why? Since studies show that commercials hold a superior record to additional trading groups in predicting significant market movements. The big commercials are usually believed to have the best fundamental supply and demand information on their markets, and thus position their trades so.
Along with the benefit of having the very best fundamental supply and demand information on their niches, large commercials also trade big size, which in itself moves markets in their favor. It is important here to remember that if a particular trader group is net long or net short isn't important to assessing the C.O.T. report. For example, commercials in silver will be the producers and they have never been net long, since they market their sales. In gold, but the commercial mix is more heavily weighted toward fabriors who buy long contracts as a hedge against future inventory needs. So, again you need to look at the net shift in places from the previous report or several of the recent reports.
Individual traders who consider positioning themselves on precisely the exact same side of the market as big commercials, once the large commercials become one-sided within their market view, is the ideal method to utilize the C.O.T. report.
Some traders do like to choose the other surfaces of the trades where the small trader in the C.O.T. accounts are shown taking. This is because most small speculative traders of futures markets are often under-capitalized and/or on the wrong side of the market.
Also, some traders will even stick to the coat-tails of the big speculators, considering that the big specs have to be good traders or they would not be in the big dealer class.
