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|Commitments of Traders (COT)|
Commitments of Traders (COT)
In commodities futures trading, the Commitments of Traders (COT) report is the only source of insight into the market positions of the key 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 (large speculators), and small traders (small speculators).
All of a trader’s reported futures positions in a commodity are classified as commercial if the trader uses those contracts for hedging.
Traders get classified as commercial by filing a statement with the CFTC that they are commercially “engaged in business activities hedged by the use of the futures or option markets.”
Commercial hedgers are institutions and individuals who operate in the cash market of the underlying commodity. Examples include farmers, international businesses, miners, and processors. When prices are high, the commercials hedge their futures sales by selling futures to minimize risk. If prices fall, they will be protected by their futures positions.
Commercials are considered to be the most influential group in the commodities markets, because they have analysts and sources of intelligence that analyze a number of variables. Although you will never know what information they have at their disposal, by examining the COT data, you can see what positions they take. This is the key point in all of this.
These “Big Dogs” are worth paying attention to – especially at extreme positions, since their buying or selling strength can move the markets. They’re like a herd of elephants stomping along a muddy river bank. You can’t miss their foot prints for sure.
NON-COMMERCIALS (OR LARGE SPECULATORS)
The non-commercials, or “large speculators,” take on risk in return for the opportunity to profit. They are speculative traders, who are generally classified as fund managers. These are trend followers, and as such are not terribly accurate most of the time - but not all the time.
This category includes all speculators with positions below reportable limits, as specified by the CFTC, and small hedgers.
Non-commercial positions also include spreading. Commercial traders are not perceived as spread traders, since they are hedging against an actual commodity. The small traders may have a spread as a position, but their individual positions are not reported since spreading in this group is relatively small.
COT: THE BIG DEAL
When analyzing historical stock prices, we are limited to five variables – i.e., the opening price, high, low, closing price, and volume in a time series (hourly, daily, weekly, etc.) The same holds true for futures, with the exception that there is also the element of open interest, which is the total of all futures and/or open contracts entered into - not yet offset by a delivery, exercise, or transaction. The aggregate of all long open interest is equal to the aggregate of all short open interest. Open interest held or controlled by a trader is referred to as that trader’s position.
As traders apply the various indicators available to them, like Bollinger Bands, RSI, Stochastic, etc., they are simply manipulating the same underlying data in an effort to make trading decisions. While the number of these manipulations is unlimited, the dataset itself is finite, never really being able to reveal any new, or more meaningful information. For futures trading, on the other hand, the COT reports provide additional and independent datasets for analysis.
The COT information is independent of price data, as COT data is not derived from price data. As such, the COT metrics take on a whole new level of importance.
The COT reports contain a myriad of raw numbers, far too many for the average person to comprehend. It is just a maze of data, which in and of itself is terribly difficult to read and understand.
To simplify the process of understanding what all the numbers really mean, Barrie Lees developed a very useful site which portrays the COT database in a user-friendly manner. Here is an example:
Here you see commercial (comm. index), non-commercial (spec index), and non-reportable positions (small index) nicely portrayed in graphical form. All the arithmetic is done for you. In other words, each respective line above is net of long and short positions for ease of reference. If all positions were summed together, you would have a straight line, since they would neutralize each other in total.
Spreads are not included in the COT graph since they are neutral (one spread = one long and one short contract). The total long positions will equal the total short positions for all three groups.
If you would like to experience the simplicity of Barrie’s site, head on over to his visitors site. You will see in front of you ~80 commodities. Select the one that you want, and it will take you to another page. There, click on the third green bar down from the top (on the left side of the page), and – walaa – you will see a graph that looks like the one above. When you buy my book, you will get all the details of how to access Barrie's site and use it. Please see below for details.
The data at the free “visitors” site is one month old, but is a good gauge of what has been going on with your commodity. If you would like to see more current data – i.e., the last month thrown into the mix – you can subscribe to Barrie’s “subscribers” version of this site for a measly US$4.95 per month. There are other sites that charge an arm and a leg for similar information, but not in near as nice presentation format.
What I am showing you here is “gold.” If you understand what I am telling you, you are well on your way to achieving a “reversal” in your trading fortunes.
There are no hard and fast rules when it comes to interpreting the effect any one group has on the futures markets. However, it is generally accepted that the commercials, or the “Big Dogs,” deserve the most respect. They are assumed to be the most successful, albeit there are times when the large speculators will indicate the strength of their commitment as greater than the other two groups. The small traders are often seen 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 above graph, you will notice that the comm. index and the spec index are at odds with each other. What this is telling you is that, with such extreme divergence of opinion or “sentiment,” the underlying tradable is about to experience a reversal of price direction – i.e., up. That is because the commercials are heavily long, and at a 100 reading, versus the 0 reading for the opposing side. This is the extremity you should always be looking for before taking your own position in the market.
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 underlying product. I saw this happen recently with sugar, where the readings were 80 and 20 in the above graph, but there was a premium on the front month. Sure enough, sugar headed north. You can check for premium at a site I reference when you buy my book. For details, please see below.
Once you know what the “Big Dogs” are up to, and you want to enter a trade on a trend change, please consult two of our info-reports called “Commodities Futures – How to buy and sell,” and “Low Hanging Fruit.” They will help you determine when the trend has in fact changed, and when it is “safe” to place your trade. If you do not have these reports, please send me a note: email@example.com. Also, please consult my book. Details below.
Word of warning … never short a commodity where the “Big Dogs” are extremely short, but there is 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. When the premium starts to fade and disappears, and the “Big Dogs” are still heavily short, then you can safely short the commodity.
Big Dogs Exposed
Sound familiar? You have spent years surfing the 'Net, and studying books and charts in search of commodity trading rules, a currency trading strategy, or stock market successful trading strategies. All you really want is the 'Holy Grail' of entry techniques. You usually end up adding one indicator on top of another, switching from one guru to the next, until you are so confused and unsure of your entry system that you are unable to make entry decisions and stay organized. You get so distracted and frustrated that you quit watching the markets all together!
Shows you how FAST you can make money when the BIG DOGS make their move - by shamelessly copying this winning group . Even I am STILL surprised by how much power they have over ALL markets - not just commodities futures, currencies, and stocks.
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