Tag: COT

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Forex Course

182. Summary – Market Sentiment

Introduction

Introduction

Introduction

If you have gone through the previous courses, you already have a solid knowledge of what market sentiment is. You should also be able to create your COT index indicator to spot market trends and points of potential reversals.

To recap, here are a few things you should have in mind by now.

  • The Commitment of Traders (COT) report is the best gauge of the forex market sentiment in
  • The COT report tracks the trading activities by commercial, non-commercial, and retail traders in the futures market.
  • In the futures market positioning, the commercial and non-commercial traders are usually on opposite sides. i.e., when non-commercial traders are long, commercial traders are short.
  • A market reversal can be anticipated when the spread between commercial and non-commercial traders is the widest.
  • The ‘Chicago Mercantile Exchange’ section of ‘Current Legacy Reports’ in the COT report is best suitable for forex traders.

Let’s now conclude this segment with a few things you MUST always keep in mind.

If you haven’t noticed by now, the COT report is best suited for long term trading. If you are a shorter-term trader, you might be inconvenienced if you solely rely on the COT report for a trading signal. You see, the trends established by the COT report index take time to form. But this shouldn’t discourage you; it’s always good to know how the market is trending.

For traders who opt to use the COT report to generate trading signals, the COT report trading indicator is not foolproof. Like thousands of other indicators in the forex market, it is bound to fail at some point. So, you should conduct thorough backtesting with different timeframes to get a proper feel of how the indicator works. Note that with backtesting, you can be able to spot instances where using the COT report can generate false signals, which will help you avoid such conditions in live trading.

Well, even after you have conducted your thorough backtest, you must know that the forex market trends are not solely driven by market sentiment. Several other factors could lead to reversals in the forex market other than the COT report. In any given month, hundreds of high-impact economic indicators and geopolitical developments can significantly influence trends in the forex market. So, be sure to double-check with your economic calendar to know what else is going on in the economy.

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Forex Course

181. Accurately Interpreting The COT Report

Introduction

Introduction

Introduction

To this point, you know how to establish market extremes using the COT report. Since you can create your COT report trading indicator, let’s learn how you can effectively interpret the COT report. While spotting the overbought and the oversold regions using the COT report seems arbitrary, a more accurate way of interpreting the COT report would be using percentages of the long and short positions.

We have already established that the best way to identify tops and bottoms using the COT report is by following the trend of the non-commercial traders. Just like the formula for creating the COT trading indicator, calculating the percentages of the long and short positions helps filter out the biases of the raw data.

Calculating the percentage of long positions

For a given currency pair, we first identify the number of long and short contracts. We then use this formula to determine the percentage of long contracts:

For the week of July 31, 2020, the EUR had a net long speculative futures position of 180,648 contracts. The percentage of the long contracts was

For the week of September 18, 2020, the EUR had a net long speculative futures position of 178,576 contracts. The percentage of the long contracts was

Now, assume that you are asked to pick the market top using the raw data for both the above dates. You would have selected the week of July 31, 2020, as your market top. The reason is that the raw data showed that the net long positions for speculative traders have 180648 contracts, while for the week ended September 18, 2020, they had 178576 net long contracts. Clearly, with the raw data, July 31, 2020, would have been the market top.

However, by calculating the percentage of the long contracts for both periods, we see that the week ended September 18, 2020, had the highest percentage at 63.1% compared to 52.6% for the week ended July 31, 2020.

Looking at the futures chart for the EUR, we can confirm that, indeed, the week ended September 18, 2020, was the actual market top.

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Forex Course Forex Daily Topic

180. Picking Accurate Tops & Bottoms Using the COT Report

Introduction

Introduction

Introduction

Our previous lesson covered how you can use the Commitment of Traders report to trade in the forex market. In this lesson, we will learn how you can use the COT report to identify the tops and bottoms, i.e., the levels where a currency is overbought or oversold.

Any forex trader would know that the best timing for a reversal trade is when the market is at extreme levels. The COT report helps us understand the trades’ volume and how the different types of traders are positioned. In the previous lesson, we learned that non-commercial traders’ positioning could be used to determine the market trend. On the other hand, commercial traders accumulate their trades around extreme levels where they believe a market reversal could occur. Thus, the positioning of hedgers can be used to determine the market tops and bottoms.

Now, let’s see how you can identify these extreme levels in forex using the COT report.

How to identify Tops (Overbought Levels) Using the COT Report

It is worth noting that when the markets are rising, the non-commercial traders are buying, i.e., they are bullish. Conversely, the commercial traders (hedgers) are bearish when the markets are rising, meaning they are actively shorting the futures contracts in a bullish market. Therefore, in a bullish market, when speculators continually go long as the hedgers keep shorting, a market top will form.

However, it is almost impossible to predetermine a market top. The best way to spot a market top is to notice a reversal beginning to occur in the market when the spread between the commercial traders and non-commercial traders has widened.

The screengrab above shows a market top formed when the short positions by commercial traders were at maximum. Also, notice that the spread between the commercial and non-commercial traders was wider.

How to identify Bottoms (Oversold Levels) Using the COT Report

When the market prices are falling, non-commercial traders are bearish while the commercial traders are bullish. Therefore, a bearish market will reach the bottom when the non-commercial traders keep selling, and the commercial traders maximize their futures bullish positions.

The best way to spot a market bottom is to notice a bear market trend reversing while the spread between the commercial traders and non-commercial traders has widened.

The screengrab above shows a market bottom forming when the long futures position by the commercial traders was at the maximum. Also, note that the spread between the commercial and non-commercial traders was widest at this point.

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Forex Course

179. Using the COT Report for Trading & Analysis

Introduction

Introduction

Introduction

Our previous lessons have covered where you can access the Commitment of Traders Report and the components contained within the report. In this lesson, we discuss how you can use the Commitment of Traders Report in forex trading.

Since the COT report gives the market sentiment in forex, this report’s publication should affect the price action in forex. Most forex traders pay attention to the non-commercial traders’ category of the COT report. The interest with the non-commercial traders is because these traders are considered speculative participants.

The nonreportable positions held by small-scale retail traders are not significant enough to move the markets. Similarly, since commercial traders are not considered speculative traders, the impact of their positions on price action tends to be subdued.

How the COT Report Affects Price Action?

When the non-commercial traders are accumulating their positions, it affirms a particular trend. Let’s take the AUD/USD, for example. When non-commercial traders, over time, are accumulating futures short position on the AUD as the AUD/USD pair falls, is a confirmation that this downtrend will persist. Conversely, when the non-commercial traders are accumulating future long positions of the AUD as the AUD/USD keeps rising, it is a confirmation that the uptrend will continue. This way, you can use the COT report as a trend confirmation indicator.

The COT report can also be used to indicate the overbought and oversold regions. The non-commercial traders, i.e., speculators, have a limit on how much they can buy or sell. These traders will reach a point where they would want to close their positions and take profits. Furthermore, when in a persistent uptrend, speculators might feel it’s no longer profitable to keep buying futures contracts at higher prices. Similarly, in a downtrend, these traders might not consider it profitable to keep selling at lower prices.

When the speculators have reached their critical limits in the forex futures, they begin reversing their trends. For day traders, the impact of the COT is diminished since its effects are long-term.

How the COT Report Publication Affects Forex Charts?

The screengrab below is GBP futures. At the bottom, if the COT indicator is showing the trend of commercial traders, non-commercial traders, and retail traders. In this case, we are interested in the non-commercial traders (i.e., large traders) since their positions influence the trend.

As you can see, the market moves at pace with the changes in the positioning of the large traders.

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Forex Course

178. Decoding The COT Report

In the previous lesson, we learned how, where, and when you can access the Commitment of Traders report. In this lesson, we will discuss the elements contained in the COT report. The CFTC prepares four COT report types: the Legacy Report, the Supplemental Report, the Disaggregated Report, and the Traders in Financial Futures report. For forex traders, the Legacy and the Traders in Financial Futures reports are of most importance.

In the previous lesson, we learned how, where, and when you can access the Commitment of Traders report. In this lesson, we will discuss the elements contained in the COT report. The CFTC prepares four COT report types: the Legacy Report, the Supplemental Report, the Disaggregated Report, and the Traders in Financial Futures report. For forex traders, the Legacy and the Traders in Financial Futures reports are of most importance.

In the previous lesson, we learned how, where, and when you can access the Commitment of Traders report. In this lesson, we will discuss the elements contained in the COT report. The CFTC prepares four COT report types: the Legacy Report, the Supplemental Report, the Disaggregated Report, and the Traders in Financial Futures report. For forex traders, the Legacy and the Traders in Financial Futures reports are of most importance.

The Legacy Report
The Legacy report is categorized by different exchanges. Forex traders pay attention to the reports from the Chicago Mercantile Exchange. The Legacy reports have categories for only futures report and a combination of both futures’ and options report. The open interest positions that are reportable are categorized into two: non-commercial and commercial traders.
The Traders in Financial Futures (TFF) Report

This report contains financial contracts, including the US Treasuries, currencies, the VIX, and Eurodollars. Like the Legacy report, it has two categories; only futures report and a combination of both futures’ and options report. The open interest positions in the TFF report are categorized into four: leveraged funds; dealer/intermediary; asset manager/institutional; and other reportable.

Understanding Terms used in the COT Report

Open Interest: The totality of all futures and options contracts that have not yet been executed but are yet to be offset by exercise, delivery, or transaction.

Reportable Positions: these are open interests that are equal to or exceed the reporting level set by the CFTC. These positions are reported to the CFTC by foreign exchange brokers, futures commission merchants, and clearing members. The reportable positions account for about 70% to 90% of all open interests in a given market.

Nonreportable positions: are calculated by subtracting the reportable positions from the total open interests in a given market. The traders involved in nonreportable positions are unknown, as is their classification on whether they are commercial or non-commercial. These are mainly small-scale retail traders.

Commercial Traders: are traders who participate in the futures and options market to hedge their core business activities. In forex futures, commercial traders seek to offset the risks of the spot market. The CFTC has set the definition that qualifies a commercial trader under Regulation 1.3 (z). Commercial traders do not seek to take possession of the assets underlying a futures contract.

Non-commercial Traders: are also known as large speculators. These traders participate in the futures market primarily as an investment by speculating on price movements. They have no intentions of taking ownership of the underlying asset to profit from the price difference.

Changes in commitments from previous reports: shows the difference between the data in the current and the immediate previous publication of the report.

Number of Traders: show the reportable traders in each category. For each category, a trader is counted if they have an open position. The number of traders in each category can exceed the total number of traders because a single trader can have open positions in different categories.

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Forex Course

177. Simple Guide To Find the ‘Commitment of Traders’ Report

Introduction

Introduction

Introduction

The previous lesson covered what the Commitment of Traders report is. In this lesson, we will focus on how and where you can retrieve the COT report. The COT report is prepared and published every Friday at 3.30 PM ET by the US Commodity Futures Trading Commission. However, you can access the latest report and those from previous issues at the CFTC website.

The CFTC publishes beforehand the release schedule for the COT report. This schedule can be accessed here. The commission also keeps an archive of all past reports. The historical Commitment of Traders reports can be accessed here.

For forex traders, reading through the COT report might seem cumbersome. If you are interested in trading the forex market using the COT report, some economic calendars make available relevant snippets of select speculative net positions from the report. Below is a screenshot from Investing.com showing the latest release of the COT report on September 18, 2020, at 3.30 PM ET.

If you are interested in an in-depth review of the latest Commitment of Traders report, below is a step by step procedure of how to access it.

Step 1: to view the latest COT report, go to the CFTC website.

Step 2: After accessing the CFTC website, the next step is to find the right report for the forex market. The CFTC published multiple Commitment of Traders reports. These reports include markets other than the Chicago Mercantile Exchange that also contain other non-futures derivative contracts.

The COT report that has data on the forex market is the ‘Current Legacy Reports.’ Under the ‘Current Legacy Reports,’ select the formats belonging to the Chicago Mercantile Exchange.  Below is a screengrab of the from the CFTC website.

To access the COT report, select ‘Short Format’ under the ‘Futures Only’ tab.

Alternatively, if you want a more comprehensive report on the future positioning of traders in the financial sector, you should look at the ‘Current Traders in Financial Futures Report.’ Below is a screengrab from the CFTC website showing this section.

Step 3: After opening the ‘ Short Format’ of Chicago Mercantile Exchange section of the COT, the next step is to identify which currency you are interested in.

Although it looks disorganized, searching through the report is relatively easy. Use the ‘search function’ of your browser to bring up the ‘search box.’ Type the currency you want to analyze. In this case, we searched for the CAD. The search results will appear, as shown in the screengrab below.

I hope you found this guide informative. Please let us know if you have any questions in the comments below. Don’t forget to take the below quiz before you go. Cheers!

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Forex Course Forex Daily Topic

176. Introduction To The Commitment of Traders Report (CoT)

Introduction

Introduction

Introduction

In the previous lesson, we discussed market sentiment in Forex. Since you already know how the sentiment comes along, in this lesson, we will discuss how the forex market sentiment is measured.

What is the Commitment of Traders Report?

The commitment of traders (COT) report is how you measure forex market sentiment. One of the primary determinants of market sentiment in forex is the demand for a currency. The COT report tracks how commercial and non-commercial traders are positioned in the forex market.

As the name suggests, the COT report gives data about commitments made by big players in the forex market to conduct future trades. The report shows the totality of futures and options contacts in the forex market, which have not yet been settled. Thus, these future transactions can impact the price movement of the currency pairs in the spot market where most retail traders participate.

How does the Commitment of Traders Report work?

The COT report is published by the US Commodity Futures Trading Commission (CFTC). The publication is released every Friday at 3.30 PM ET. This report shows the total outstanding open positions in the forex futures market as of Tuesday of that week. The data in the COT report includes futures of the major currencies and most of the minor currencies.

According to the CFTC, the COT report is a breakdown of the futures and options market positioning of at least 20 traders. These are traders whose futures and options positions in the forex market are above or equal to the reporting levels set by the CFTC. In our subsequent lessons, we will further explain the type of traders included in the COT reports and the reporting levels.

It is worth noting that the majority of the transactions in the interbank forex market are private and are not made public. For this reason, the retail traders do not have a lot of knowledge about the significant transactions that occur daily in the forex market. Therefore, the COT reports play a significant role in publicizing the futures positioning in the forex market.

Conclusion

The forex market portion of the COT report shows the totality of the long and short futures position adopted by traders. These are speculative traders; whose primary objective is to anticipate future price changes and place their bets regarding a currency. Therefore, monitoring how these market players have positioned their future trades might increase your analysis of future trends in the forex market.

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Forex Fundamental Analysis

What Should you Know About Commitments of Traders (COT) Report?

Introduction

Introduction

Introduction

One of the most significant uncertainties for policymakers is the future economic performance. All the policies adopted by governments and central banks are geared towards influencing the future’s economic performance. Economists, financial analysts, and forex traders alike use models and economic indicators to predict future economic performance. The commitment of traders (COT) report gives some insight into future economic performance.

Understanding the Commitments of Traders Report

In the US, the COT report is published by the Commodities Futures Trading Commission (CFTC). The COT report shows participation in the future market.

The COT report is comprised of four different types of reports. They are:

Legacy reports: This report breaks down the open interest positions of commercial, noncommercial, and retail traders into long, short, and spread positions. The report shows the total interest positions that are open along with the changes from the previous reporting period. This report is broken down into the long and short versions of ‘Futures Only’ and ‘Futures-and-Options-Combined’ segments. The Legacy COT report shows the open interests for 17 exchanges.

Supplemental reports: This report document contracts 13 agricultural commodities. These contracts are of both futures and options positions for noncommercial, commercial, and index traders together with nonreportable positions.

Disaggregated reports: This report covers the following five sectors; agriculture, petroleum, and its products, natural gas and its products, electricity, and metal. This report’s market participants are categorized into; producers, swap dealers, managed money, and ‘Others.’

Producers are entities whose core business activities involve the production, processing, and handling of physical commodities. These producers use the futures market to manage or hedge against risks potential to their core operations.

Swap dealer is one who enters into an agreement to exchange cash flows of a given commodity over a specific period. They use the futures market to manage and hedge against risks inherent in their swaps.

Money manager, as used in this report, means a registered commodity pool operator, an unregistered fund, or a registered commodity trading advisor identified by CFTC. They participate in the futures markets on behalf of their clients.

Others represent all other participants in the futures markets who cannot be placed in the above categories.

Traders in Financial Futures (TFF) report: This report shows the participants in the futures market for currencies, stocks, US Treasury securities, VIX, and Bloomberg commodity index. It categorizes market participants into; dealers, asset managers, leveraged funds, and others.

Dealer/ Intermediary is a participant on the ‘sell-side’ of a trade. Although they do not exclusively participate in the futures market, they have matched books meant to offset their risks. They are made up of large banks.

An asset manager is an institutional investor such as pension funds and insurance companies whose clients are predominantly institutional.

Leveraged funds hedge funds, registered commodity pool operator, an unregistered fund, or registered commodity trading advisors. Their activities in the futures market involve arbitrage across and within markets and taking outright positions.

Others include all reportable traders who cannot be placed in the above categories.

Using the Commitments of Traders (COT) Report in analysis

The COT report can be used to show whether investors are going long or short in the futures market. The CFTC collects the data used in making the COT report from reporting firms such as Futures Commission Merchants, foreign brokers, exchanges, and clearing members. Individual traders can also self-report by filling out the CFTC Form 40.

The COT report shows the open interests in the futures and options market as of Tuesday of each week. Since the COT report also shows the changes in the open positions, it can be used to show the sentiment about the economy over time. It is worth noting that the market positioning of the commercial traders and the noncommercial (speculative) traders is always the opposite of each other.

Commercial traders handle physical commodities. For them, it is natural to expect that the future price of their commodities will rise. In the futures and options market, commercial traders are hedging against risk; thus, they go short just in case prices fall. The noncommercial traders do not handle the underlying physical commodities, and thus, they are participating in the futures market speculatively and can either be long or short. Therefore, by looking at the behavior of noncommercial traders in the futures markets, we can gain insight into future price trends and the economy.

Take the above example of wheat futures, when the noncommercial traders are net short positioned in the futures market, the prices of wheat falls. Consequently, the wheat farmers and traders receive lesser pay for their products. In this case, their purchasing power is lowered, which decreases the aggregate demand in the general economy.

Impact on Currency

Forex traders pay close attention to the noncommercial traders in the financial futures. These speculative buyers tend to lead the market. When they are net long in a particular currency, it means that the demand for that currency will increase and, with it, its value relative to others. For most forex traders, the best way to trade forex using the COT report is by establishing the overbought and the oversold regions. These are the regions where trend reversal is imminent – when the noncommercial traders are at the lowest point could indicate a period of sustained short selling, and a reversal could follow.

The COT report can also be used to show a trend. For example, let’s take an instance where noncommercial traders are continuously net long on a particular currency in the futures market while the price for that currency steadily increases. With this strategy, forex traders can use noncommercial traders’ market positioning as confirmation of a trend.

Sources of Data

The US CFTC publishes the COT report.

How the publication of the COT Report Affects Forex Price Charts

The latest publication of the COT report was on October 2, 2020, at 3.30 PM ET. The release of this publication can be accessed at Investing.com.

The screengrab below is of the weekly CFTC speculative net positions of the AUD from Investing.com. To the right is a legend that indicates the level of impact the fundamental indicator has on the AUD.

As can be seen, moderate volatility is to be expected.

As of Tuesday, September 29, 2020, the AUD’s speculative net positions was 8.9K compared to the previous Tuesday’s of 16.3K. Noncommercial traders are net-long in the AUD futures, which should be positive for the AUD.

Now, let’s see how this release made an impact on the Forex price charts.

AUD/USD: Before the COT Report Release on October 2, 2020, Just Before 3.30 PM ET

The AUD/USD pair was trading in a neutral position before the release of the COT report. The 20-period MA was flattened with candles forming just around it.

AUD/USD: After the COT Report Release on October 2, 2020, at 3.30 PM ET

The AUD/USD pair formed a -minute bullish candle after the COT report’s release indicating that the AUD had appreciated relative to the USD. However, the pair could not sustain a bullish trend since it later continued trading in a neutral trend.

The effects of the COT report are long-term. For this reason, the weekly publication of the report has little impact on the short-term forex market.