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An Introduction to the Commitments of Traders Report for Futures Traders —by Robert James Deadman |
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While Commitments of Traders (COT) data has been around for over a decade, its use in futures among the casual trader is almost non-existent.
There are two primary reasons for this; because the major data providers don't supply the information and the few who do don't supply it in a readily
useable form. As time progresses, this factor will change. The second reason is that there is little information on what the Commitments of Traders
even is, let alone how to use it. This series of articles will try to alleviate this problem. Starting in 1962, the Commodity Futures Trading Commission (CFTC) started requiring all significant traders meeting certain criteria to report the futures positions they were holding. Due to its infrequency and delay in reporting to the public (only once a week and at least three days late) it doesn't have much value in day-trading use, but provides valuable information on the daily, weekly, or monthly scale. |
| Reading the COT Report |
| The COT reports contain far too much information for a detailed explanation here. A shorter version will be explained. Below is a sample of the COT Short Form. |
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There is a lot of information here, but let's focus on only a few areas.
The first part is the identifying line. It lists Non-Commercial, Commercial, Total, and Nonreportable positions. The Non-reportable positions
would be the small trader positions. The first thing to note is that the 'Total' is not the total for all positions, but only the total for the
Non-Commercial and Commercial positions. The Nonreportable positions have been excluded from that value. Second is the line identifying the position holdings. Each position has Longs and Shorts available, except the Non-Commercial which also has spreading. The Commercial traders are not viewed as spread traders since they are hedging against an actual commodity. The Small Traders may spread a position, but the individual positions are reported since spreading in this group is relatively small. The last line of this focus is the 'Commitments' line. These are the actual reported values for each group. The first values that we see are the longs, shorts, and spreading of the Non-Commercial group. What needs to be derived is the "Net Position" of the Non-Commercial group. To derive this, take the difference between the longs and the shorts. In this case, 97,559 - 104,440. The result is -6,881. What this means is that the Non-Commercial traders are positioned to the short side by 6,881 more contracts more than they are to the short side (a primarily bearish position). There is no need to add the spreading positions in since it would result in the same "net" value. If they were added in, then 28,545 would be added to both the long and short positions since a spreading position has a contract held on both sides. There is no need to add the spreading positions in since it would result in the same net value. If they were added in, then 28,545 would be added to both the long and short positions since a spreading position has a contract held on both sides. We perform the same netting process on the Commercial positions: 229,062 long positions minus 200,905 short positions results in 28,157 net long. Commercial traders are positioned on the long side by 28,157 contracts more than they are to the long side-they are bullish. The process would finally be performed on the Non-reportable positions: 90,359 long positions minus 111,635 short positions results in -21,276. The Nonreportable positions (small traders) are positioned to the short side by 21,276 more contracts than they are to the long side (a primarily bearish position). Note that all of the respective positions, when added together, cancel each other out. All of the long positions combined for the 3 groups (416,980), when added together, will match all of the short positions for the 3 groups combined (also 416,980). This has to happen because for every long position there is an opposing short position taken at the same time. Since the number of long positions and the number of short positions is identical, adding the number of Non-Commercial spreading positions (28,545) to the total of either side (416,980) will result in the total Open Interest (445,525) for the commodity as of that date. Most people omit the spreading positions from their COT calculations. This is because spreading positions are trying to profit from the difference between contract prices, while non-spreading positions are taken typically for anticipation of the future value of the underlying commodity (usually trend following or hedging purposes). |
| Plotting COT Movement |
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Many people view just knowing the current positions as being sufficient. Yes, it's important to know where each group lies, but it's only a small
piece of a total picture. Most traders would view a snapshot of a commodity's price as being useless. Just knowing the price has very little value
without knowing where the price has been. Traders look for trending activity, support/resistance lines, indicator calculations, etc. With knowledge
of just one price, a world of information is being lost. The same is true for Commitments of Traders information. Just knowing the net positions
means very little without knowing if a particular group is acquiring or distributing their long or short positions. One of the primary methods used in COT analysis is plotting the net positions historically. While most providers show the data in a weekly format (being released once a week), this article will show the weekly COT data propagated for the daily trading days that are present in the chart. This makes it possible to apply the indicators and analysis to use with daily data, as opposed to only weekly or monthly trading strategies. The following chart shows the data for the Canadian Dollar. The Commercials net positions are shown by the blue line, the green line shows the Non-Commercials net positions, and the red line shows the Nonreportable (Small trader) net positions. |
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One of the most heavily used strategies with COT is to "follow the Commercials" since they are the only ones in the know. However, observation shows
that for a trader to follow the activities of the Commercials only is probably going to result in disaster. The typical belief is that the Commercials
actually use or deal with the underlying commodity and will them know of the future supply or demand of the product. On the surface this sounds like
great advice, except that the Commercial traders hold their positions for completely different reasons than other traders do. The Commercials are more
interested in locking in a price rather than making a profit from any market movement. The future contract is used to offset any variations in price,
and they can do this because they either currently possess the underlying commodity with intent to distribute at a delivery date, or they will be
acquiring the commodity at a delivery date (remember, this is what futures contracts were actually designed for). Because of this, even if their
contract moves against them, the actual commodity offsets the loss. The problem for any other trader is that they don't deal with the actual commodity. They buy or sell contracts with no intent of delivering nor taking delivery of the commodity involved. Therefore any gain or loss from a contract is a real loss without any product to hedge against. To follow the philosophy of "always follow the Commercials" is to always follow the one group who has locked in a price and therefore no longer has a significant concern as to whether the future price goes up or down. This can be demonstrated above in the picture of the Canadian Dollar with the net COT information also displayed. The majority of the time the Commercials are either positioned against the trend (for example, by holding mostly long positions when the market is declining), or by moving their positions against the direction of the trend. On the other hand, the Non-Commercials are typically moving their contracts towards, or taking positions in, the same direction as the trend. By observing which positions each group is taking at any particular time, a trader has the ability to watch the buildup of positions by any particular group, and therefore has another tool to anticipate price movement. |
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