Commitment of Traders report or COT report for short is a weekly report published by the CFTC for mandatory disclosure of trade positions from the institutional traders. Often considered to level the playing field, the CoT report is published every Friday for data from the previous Tuesday. This is a valuable report that is a must have for every serious trader.
In a nutshell, the Commitment of Traders report shows the number of long and short positions taken up by commercials, non commercials and small (retail traders). In effort to bring transparency and to prohibit institutionals from engaging in market cornering tactics, the CoT report is an extremely useful tool for traders. However, it is not a simple report to read and often leads to confusions. Furthermore, if you do not know how to apply the data from the CoT report, it is literally useless.
The report is published as a text file and can be accessed for free from the CFTC’s website. Below is how a sample CoT report looks like.
Components of the CoT Report
The CoT report is basically a table that displays data on varied markets including base and precious metals, currency spot markets and commodities.
The CoT report has three major categories of traders.
Commercials: This category of traders are those who are actually engaged in the business. Think of commercials as wheat farmers, or soybeans farmers. In effect, this category has to do with the group that is actually involved in selling or buying of the market.
For commercials, this is an important component in the market. For example a chocolate manufacturer might be interested in the prices of sugar of cocoa. Using the CoT report and reading into the Commercial holdings category, a lot can be deciphered. For example, if a price increase is depicted, the chocolate manufacturer could purchase sugar or cocoa ahead of time.
Non-Commercials: Also referred to as large speculators, this group is made up of institutional traders such as hedge funds, managed money and so on. This group makes up the larger of the three groups and are pure speculators. In some versions of the CoT report, this group is also referred to as ‘Speculators‘. This category is primarily responsible for price fluctuations as they accumulate and distribute the markets, resulting in volatility. Of three categories, the ‘Speculators, or Non-Commercials’ is the group that is to be watched.
Non-Reportable: This group is the least significant of the three and is mostly vague, made up of retail traders. Quite often, it can be noticed that the non-reportables tend to take opposite positions against the non-commercials.
What does the CoT report detail?
The Commitment of Trader report basically gives a weekly overview of positions held by the three groups and the open interest. It is published every Friday for data for the previous Tuesday. By now it would be obvious that the CoT report is quite lagging. However, by closely monitoring the non-Commercial’s open interest and shift from longs to shorts can help a trader understand where price is likely to move.
As you can see, the table is categorized into the three groups. You can also see the number of contracts per each market. Also in the table is a percentage change from the previous week’s report.
Net long – Net short – When reading the CoT reports, one might often come across the phrase, net long or net short. This simply means the number of contracts that are either long (BUY) or short (SELL). A decrease in Net long, shifting to net short determines that the non-commercials are liquidating their long positions and taking up short positions, thus indicating potential trend reversals depicted on the charts.
The net long or net short isn’t actually shown on the CoT report but is rather derived from the data. To calculate the net positions, one simply needs to take the difference between the long and short positions. This number gives either a positive or a negative number indicating if the non-commercials are increasing their long positions or adding to short positions or if there is a shift from long to short or vice-versa.
The ‘Spreading‘ is another element that can be seen on the CoT report and can be ignored. For those who want to know, firstly ‘Spreading’ is applicable only for non-Commercials, because commercials are not spread traders and are actually hedging against the actual commodity.
The spreading denotes a contract that is held on both the long and short side. For sake of simplicity and the fact that spreading doesn’t really add value, this element of the CoT report can be ignored.
Advantages of the CoT report
The CoT report enables traders to identify particular groups in the report and when they move heavily into a position (shift from net long to net short and so on).
The CoT report enables traders to see when a group has moved heavily into or out of a position.
Besides the data published by CFTC, traders who use the MetaTrader terminal can directly access the CoT report from the ‘News’ tab. Usually titled, ‘Net Speculative Positions’ and is an abridged version of the CoT report. As such this information comprises of the shift from net longs to net shorts or vice versa.
CoT Report Indicator for MetaTrader
For those interested to see the CoT report in a graphical representation alongside the security’s price, then CoT4Metatrader.com offers weekly cot reports delivered in a file every Friday.
In order to use this CoT report, the file needs to be replaced and the CoT indicators (available for free from the website) automatically plots the changes and gives a visual representation of the CoT report.