Talking Points:
What Is The Commitment of Traders Report?
Who Are the Players In The Report?
How to Read CoT for Directional Bias
What Is the Commitment of Traders Report?How would you like to know what the smartest guys and girls in the room are doing? Thanks to a requirement by the Commodity Futures Trading Commission, the largest futures traders in the world are required to report their positions which can easily be tracked due to the margin they must pay to hold their large positions which the CFTC has been publishing since 1962 and since 2000, every Friday at 3:30ET pm. This information can be of extreme help due to the people who come into the Futures market like hedge funds to make a return above their respective index or some of the largest companies in the world with real-time data of the health of the economy that come to the futures market to hedge their exposure to price fluctuations of raw materials that they use to make their product or preform their service.
Learn Forex: CoT Report for Euro FX (EURUSD) as of 01/28/2014
Courtesy of CFTC
It may be helpful to think of the CoT report as a sentiment indicator with a lot more depth than most indicators. The depth, of course, comes from the fact that the readings are based on the largest future traders and can help you see when large fortune-500 companies switch their outlook on something that you’re trading. In short, this report provides incredible levels of insider intelligence that you’d be hard-pressed to find in another avenue.
Who Are the Players In The Report?Commercials – Using the futures market primarily for hedging unfavorable price swings to their daily operations. They likely have the best insight as to what the demand and future is for the market as a hole and have some of the deepest pockets. These players are also known as commercial hedgers.
Examples: Coca Cola in the Sugar Market or American Airlines in the Gasoline Market
Non-Commercials (Speculators / Funds) – Traders, whether hedge-funds are large individuals, who have no interest in taking delivery but are rather in the market for profit and meet reportable requirements of the CFTC.
Examples: Hedge Funds and large banks or large Commodity Trading Advisors (CTAs)
Nonreportable Positions – Long & Short open interest on positions that don’t meet reportable requirements, i.e. small traders.
Examples: This is the leveraged players without deep pockets and are shaken out on big moves, similar to the DailyFX SSI.
How to Read the CoT for Directional Bias?Upon the first reading of the CoT, you may be confused how future positions in USD, JPY, GBP or EUR could be helpful for trading EURUD, USDJPY, or EURGBP. There is a lot to learn about the Commitment of Traders report but what’s often helpful is to find when there is a very strong divergence between large speculators and large commercials.
Learn Forex: Look to See What Hedge Funds Are Buying Selling
Courtesy of CFTC
Learn Forex: Non-Commercials / Hedge Funds Sold USDJPY Longs & Charts Confirm This
Chart Created by Tyler Yell, CMT
The first place to start with is a clean understanding of Net Positioning which is shown clearly on the reports and the week over week differential of major market bias (circled above). It may be helpful to know that what you’re looking for isn’t as much the specific number but a clear sign in % of open interest or bias so that you see Non-Commercials / Funds flipping against the primary trend. Furthermore, when you see a key flip in sentiment of non-commercials / funds who are in it for the money and not to be hedged like commercials, and there is a confirmation on the charts that a trend is exhausting, you are likely trading in the direction of the big kids.
As you can see from the last report in January, the number of funds off-loading the JPY shorts increased dramatically from the week prior. When you see this type of shift from major funds, you can look for other signs that show the prior trend is losing steam and that maybe you should exit the trade too. The chart above of USDJPY notes that there have been 4 bearish key days on USDJPY since the start of 2014 at the same time non-commercials have unloaded their USDJPY longs / JPY shorts giving credence that this move down may have more to go.
Another excellent tool, is the Commitment of Traders Analysis from DailyFX. This weekly report provides analysis of the CFTC report, showing the positioning of Forex futures trades with a synopsis of the key flips in positioning. This report also helps traders by providing 52-week percentiles of major moves so you can see if we’re currently at annual bullish / bearish extremes so that you should be tightening stops or looking for price action to confirm the funds are selling out so that you can follow.
Bottom Line: Look for Chart Validation of what the Non-Commercial Are Doing. When you have a large percentage (greater than 10%) of non-commercials flipping their bias, it’s time for you to take note. Lastly, if you want to really juice up your understanding of market sentiment, you can get a better feel for how a sample group of non-reportables or smaller traders are positioned in OTC FX via the DailyFX Speculative Sentiment Index which is updated twice a day.
