The Commitment of Traders and the Trends

What if you could, at a particular moment in time, know exactly how money is moving in and out of the markets? In the futures market, you can - thanks to a very powerful data release known as the Commitment of Traders or COT data report.

The Commitment of Traders is released by an organization known as the Commodity Futures Trading Commission, a regulatory agency charged with maintaining the United States futures market, very much like the SEC is responsible for the securities and stock markets.

What's in a COT Data Report?

Inside the weekly COT Data report is information surrounding the particular positions of different types of traders. The data used to complete the COT report is packaged by the CTFC from submissions from various market participants and brokerage firms to provide a full breakdown of who is holding what position and how the current levels compare to previous reports.

Within the COT, the data is broken apart by contract type (soybeans, gold, or pork bellies, for example) and then finally into sections made up of three different classes of traders: commercial traders, non-commercial traders, and nonreportable traders.

Commercial traders are traders who have a real, verifiable interest in the commodities market. A farmers co-op with a position of 10,000 corn contracts would be considered a commercial trader, since it intends to actually provide enough corn equal to 10,000 contracts. At any one time, commercial traders will make up one half or more of the positions listed in the COT report, since it is on the futures market where their products are eventually priced.

In the commitment of traders report, a non-commercial entity is one that is in the market for purposes of speculation, not to take physical delivery of an actual commodity. A few examples of a commitment of traders listed, non-commercial trader would be Goldman Sachs or JP Morgan, which routinely trade large futures positions to make a cash profit.

Finally, nonreportable COT data pieces are those made up of retail traders, who in all actuality, make up so little of the market they are usually of little importance. At most, nonreportables will make up no more than 25-30% of total positions, and they are more likely to hold just 10% of the total open interest.

Banking on the Commitment of Traders

Investors routinely utilize the COT data as an effective momentum indicator, judging the strength of bull moves against the change in commitment of traders data. If the price is rising as non-commercial net longs increase, it would be reasonable to assume that investment banks and large speculators are betting heavily on an increase in prices.

Traders familiar with COT data frequently refer to non-commercial speculative interest as the “smart money,” since commercial traders have to be in the market as a function of business, and nonreportable traders not only make up an insignificant portion of the market, but are less likely to be as informed as large, non-commercial speculators.

With some time spent in tracking changes in the commitment of traders, investors will be able to quickly spot abnormal activity, large changes in long and short positions, as well as find when interest in a commodity or cash-settled futures contract is topping or bottoming. Much like “short interest” in a stock, COT data can also be utilized to see when the price will soon reverse when investors close or buy to cover their positions.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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