Commitment of Traders (COT)

Using the COT Report in Forex Trading

May 20, 2019 3:33 PM +02:00Warren Venketas, Analyst

The COT report is a weekly sentiment report that can provide forex traders with important
information on the positioning of currency pairs. Issued by the Commodities Futures Trading
Commission (CFTC) the COT report can be cross-referenced with a trader’s underlying forex
strategy.
The forex market is not the only financial market included in the COT report analysis, which makes
this valuable commentary for all traders.

COT Report Analysis in Forex Trading: Main Talking Points

• What is the Commitment of Traders Report?

• COT report trading strategies

• Using the Commitment of Traders Analysis from DailyFX

• Learn more about trading with market sentiment

WHAT IS THE COMMITMENT OF TRADERS REPORT?

The Commodity Futures Trading Commission (CFTC) COT report offers a unique look at the
positioning of futures traders across a broad range of markets, and it is quite often used as a proxy
for the FX trading market. In the weekly report, the US regulator breaks down long and short
positions and overall open interest according to three separate trading groups. Knowing where
traders’ positions are in the forex market can be valuable information when constructing trade ideas.
It is a requirement of the CFTC that the largest futures traders in the world must report their
positions. These positions can be easily tracked due to the margin they must pay to hold their large
positions which the CFTC has been publishing since 1962.
More recently since the year 2000, reports are released every Friday at 3:30ET pm. This
information can be highly valuable to traders due to the nature of people who come into the futures
market. This includes institutions like hedge funds who enter to make a return above their
respective index. Some of the largest companies in the world with real-time data of the health of an
economy come to the futures market to hedge their exposure to price fluctuations of raw materials
that they use to make their product. This allows traders to gauge the positioning of the market at
that specific time.

Breakdown of the three main groups mentioned in the COT report:

1. Commercial Traders – These are most often large multi-national corporations with
commercial hedging interest in their respective futures markets. For example, a large
Japanese manufacturer may want to hedge their exposure to fluctuations in
the USD/JPY exchange rate.
2. Non-Commercial Traders – This data most often relates to large speculators such as
Commodity Trading Advisors and similarly large institutions speculating in specific futures

1
 markets. For example, a major commodity fund believes that the US Dollar will appreciate
against the Euro and, as such, place bets on Euro forex futures.
3. Non-Reportable Traders – Non-Reportable Traders are traders who don’t fall into either
group. Most often seen as small speculators, these are arguably less significant and do not
frequently figure into COT report analysis. For example, these traders refer to the leveraged
players without deep pockets who are shaken out on big moves
With these general definitions in mind, traders can then decide how to use this information. The
image below depicts an extract from the COT report with the three main groups as outlined above.

EUR/USD COT Report:

COT REPORT TRADING STRATEGIES

Upon the first reading of the COT report, it may seem confusing how future positions
in USD, JPY, GBP or EUR could be helpful for trading EUR/USD, USD/JPY, or EUR/GBP. There
is a lot to learn about the COT report but what’s often helpful is to find where there is a strong
divergence between large speculators and large commercials.
USD/JPY COT Report:

2
USD/JPY chart confirmation of Non-Commercials selling USD/JPY long positions:

The first place to start with is a clean understanding of ‘net positioning’ which is shown clearly on
the report itself, as well as the week over week differential of major market bias (circled above).
The specific number is not necessarily important, but rather a clear sign in percentage terms of open
interest which makes it easy in identifying ‘Non-Commercials’ flipping against the primary trend.
Furthermore, when a key flip in sentiment of ‘Non-Commercials’ is realized and there is
a confirmation on the charts that a trend is exhausting, traders are likely trading in the same
direction of the big kids.
From the report located above, the number of funds off-loading the JPY shorts increased
dramatically from the week prior. When this type of shift from major funds is observed, traders can
look for other signs that show the prior trend is losing steam which could indicate a possible exit of
open positions. The chart above of USD/JPY notes that there have been four bearish key days
(highlighted in red) on USD/JPY since the start of 2014 at the same time non-commercials have
unloaded their USD/JPY long positions giving credence that this move down may have more to go.

3
Further validated by the technical indicators used in the chart – RSI and 100-day moving
average which both signal a bearish bias.

Using the DailyFX COT Analysis Report

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, showing annual bullish / bearish extremes which assist in trade
execution - tightening stops or looking for price action to confirm the funds are selling out.
Summary: Look for chart validation of how the ‘Non-Commercial’ traders are positioning
themselves. With a large percentage (greater than 10%) of ‘Non-Commercials’ flipping their bias,
traders should take note of this. Lastly, traders can increase their understanding of market sentiment
and get a better feel for how a sample group of the ‘Non-Reportable’ or smaller traders are
positioned in OTC forex via the IG Client Sentiment Index which is updated twice a day.

EUR/USDBEARISH
Data provided by
 of clients are net long.
CHANGE IN LONGS SHORTS OI
DAILY 7% -9% 1%
WEEKLY 6% -7% 1%

What is the Commitment of Traders (COT) Report?

Nov 13, 2020 1:09 PM +01:00Paul Robinson, Strategist

WHAT IS THE COMMITMENT OF TRADERS REPORT?

• We previously looked at using the COT report in FX trading, in this article, we take more of
a big-picture perspective on this very important sentiment report.
• The COT report can offer a unique perspective for sentiment, helping to compliment IG
Client Sentiment in the effort of getting a better grasp on positioning in a market at a
specific point in time.
The Commitment of Traders (COT) report is published weekly by the Commodity Futures
Trading Commission (CFTC). It’s often times referred to as the “COT” report. It provides a
breakdown of open interest for all exchanged-traded futures contracts under the rule of the CFTC. It
is published each Friday afternoon Eastern Standard Time (EST), and represents the positioning
profile of all market participants for the week ending on Tuesday. According to the CFTC, the COT
has informal beginnings which can be traced back as far as 1924; however, the report officially

4
began release in 1962. It has gained increasing popularity in the past 25-30 years with the
increasing importance and size of the futures market.
There are three general types of market participants which are represented in the report –
commercial traders, non-commercial, and non-reportable traders. Each group has its own specific
interest for their involvement in the futures market.

Commercial traders, also known as ‘hedgers’, are traders with exposure to a commodity or

financial instrument. For example, corporations who require raw materials for the production of
goods. To these companies it is viewed as a form of insurance against adverse price fluctuations and
allows for a means of price stabilization of key inputs which impact the cost of production. It can
also apply to financial instruments, such as interest rate contracts; where for example, a bank might
want to hedge against fluctuations in interest rates.

Non-commercial traders, also known as ‘large speculators’, are entities such as hedge funds,
Commodity Trading Advisors (CTAs), Commodity Pool Operators (CPOs), and other large traders
who use the futures market to speculate on price fluctuations.

Non-reportable traders, also known as ‘small speculators’, are the smallest traders in the
marketplace. These can be individuals, proprietary trading firms, small hedge funds, and anyone
who establishes small position sizes for speculative purposes. This group has grown over the years
with the advent of technology and access to the market electronically.

WHAT INFORMATION CAN BE GAINED THROUGH THE COT REPORT?

(For purposes of simplicity, we’ll refer to commercial traders as ‘hedgers’, non-commercials as
‘large speculators’, and non-reportable as ‘small speculators’.)
First off, it’s worth noting that due to the infrequent and delayed release (weekly reporting on
Friday’s for the week ending on Tuesday), COT data is best used as an intermediate to long-term
indicator. It’s a sentiment analysis tool and should be used in conjunction with other forms of
analysis, i.e. – technical & fundamental.
There is more than one way to gain information from these weekly reports, but first let’s determine
which of the three aforementioned group of traders might offer the most valuable information.
Hedgers and large speculators take positions opposite of one another. The reason for this is due to
the differing intentions just discussed. Hedgers are interested in price stabilization while large
speculators are looking to profit from large price fluctuations hedgers try and avoid. As the market
rises hedgers tend to be sellers while large speculators, collectively, typically employ trend-
following strategies which would look to go long the market. The same can be said in reverse for
markets which trend lower.
In the graph below, in the gold market you can see a nearly 100% inverse correlation between the
activity by hedgers and large speculators. The tendency for large specs to use trend-following
strategies can also be observed, as the general direction of their trading activity and the price of gold
move relatively in-line.

5
Data Source: CFTC
How might this information be useful? We can safely take the commercial traders out of the
equation since we already have a good idea of what they are doing by just looking at what large
speculators are doing. We won’t focus on small speculators, as they tend to exhibit more erratic
behavior, but loosely follow the positioning of the large speculators. It’s just not with the same
degree of negative correlation observed between large speculators and hedgers.

VARIOUS WAYS COT DATA CAN BE INTERPRETED AND INCORPORATED INTO

YOUR TRADING METHODOLOGY
It’s important to first remember that COT studies provide a gauge of market sentiment, and as such,
they need to be used in context with other factors which fit within your trading methodology (i.e.
price action and fundamental analysis). They are best used to identify broader conditions which
may be more or less conducive for price to move in a particular direction. Let’s look at how this can
be most effectively achieved by looking at indications from the COT report as a trend identifier, an
overbought/oversold indicator, as well as a sign of a breakout leading to a new trend.

Large speculators typically look to identify intermediate to long-term trends

Let’s look at how we might be able to utilize the information observed in the activity of large
speculators. When strong trends develop, this group tends to be buying when the market is rising
and selling when the market is falling. By looking at which direction their positioning is heading,
this information can be used as not only a gauge of direction but trend strength as well.

6
Large specs following the trend

Data source: Bloomberg, CFTC

Breakout/Momentum: Sharp changes in positioning with price can indicate a breakout and
momentum as the trend changes
The Japanese Yen was in a very persistent downtrend from 2011-2015, and large speculators were
correctly net-short for much of the bear market. However, in early 2016 they not only flipped from
short to long, it occurred very rapidly. The sudden change, in only four weeks, saw their position-
size move from the lower one-third of the range over the prior year to net-long for the first time in
several years.

Around this same time the Yen experienced a price breakout above resistance to its highest levels in
15 months. The sudden surge in buying turned out to be a sign of momentum as the breakout was
sustained and led to a multi-month rally of approximately 15%. Notice at other times we didn’t
have this signaling with several failed short-covering rallies within the context of a strong
downtrend. The key distinguishing factor here from the prior times was that large specs were net-
short and there also wasn't any confluence with price changing trend (i.e. breakout above
resistance).
Japanese Yen futures reverse course on surge in large spec buying, break above resistance

7
Overbought/Oversold indicator
Many traders use momentum indicators such as RSI and Stochastics to identify when a market may
be overbought or oversold. As an intermediate to long-term indicator the COT profile of large
speculators can be used similarly. How this behavior is viewed needs to be taken into context with
market conditions, trend, and how other factors are impacting the market.
Copper went into a bear market from 2011-2016. During this time there were numerous attempts by
the commodity to rally, but within the context of a clear downtrend those only proved to be
temporary before sellers took over again. Net-positioning on many of those occasions was pushed
to a 52-week extreme which coincided with the peak of the counter-trend rallies. It acted as an
indication of overbought in a pervasive downtrend.

Copper futures trending lower with peaks in buying leading to swing-highs

Created with Tradingview.com

COT VERSUS IG CLIENT SENTIMENT DATA
As noted earlier, due to the infrequency and delay in reporting, the COT report is best used as an
intermediate to long-term sentiment indicator. This is where more timely data can be used to
determine short-term sentiment, and even in conjunction with the COT data. IG Client Sentiment
data, or IGCS for short, shows real-time positioning of retail traders through a ratio of long
positions versus short positions. IGCS can be an effective contrarian indicator as the retail crowd
tends to trade against developing trends.