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TE10 - Understanding the CoT Report

"The Commitment of Traders report is no doubt something that will fascinate many traders. After all, the goal in trading is to find an edge in the markets. Some information that can put you ahead of the rest. The CoT report is one such report that aims to bring about some transparency. Because the markets are made up of large institutional players, the CoT report aims to make it a bit of a level playing field. Thus, the widely available free information is used in the retail markets. It provides traders with some key information that is otherwise not possible to have. In the previous article we gave you a brief outline to the Commitment of traders report. But in this report we will dig closer into understanding what the CoT report is all about and also explain some of the key points in this report. You should be able to have a basic understanding and be able to read the information from the CoT Report."

In the previous article, we learned what the Commitment of Traders report is all about. In this article, we take a look at the Commitment of Traders report and explain the various aspects of the report that is released.

As mentioned earlier, the Commitment of Traders report comprises of positions, compiled on a weekly basis. The three main groups in the Commitment of Traders report are as follows.

Commercials or Hedgers

The commercials or the hedgers group is a category that comprises of those who actually have a stake in the commodity. This includes both producers and consumers. The commercials are commercial entities. You can think of commercials are those such as producers, ex: farmers and consumers such as factories that are in need of the raw materials.

The positions held by this group reflects the demand and supply. Commercials use the futures markets to take delivery of the underlying instrument at a future date, at a price that is fixed when the contract is closed.

For example, you can engage in a futures commodity market such as grains. As a farmer, you can sell a futures contract to a rice manufacturing firm. In doing so, you are locking in a certain price. This removes the uncertainty of the fluctuating markets and also removes the volatility that comes with it.

Non-Commercials (Large Speculators and Small Speculators)

Because the futures market is open for anyone to trade, the non-commercials are also a significant group. The positions reported in this category comprises of institutions, hedge funds and so on.

This group is not interested in the actual trading of the underlying commodity or asset. On the contrary, the non-commercials are only interested in speculating. Thus, when the trends are established, commercials can step in and trade in the position of the trend.

This in turn tends to push the price of the commodity higher in the futures markets. Likewise, when non-commercials spot an opportunity, they can also take reverse positions. The main difference between commercials and non-commercials is that while commercials take delivery of the underlying commodity, non-commercials close out their contracts before delivery.

This leads to a cash or a non-physical delivery of the futures contract.

Non-reportables

The non-reportables category belongs to a sector that are mostly small retail speculators. This position is often disregarded. The general feeling is that non-reportables often have an opposite position to that of the non-commercials.

The non-reportable positions are those made up of individuals or firms who do not have a large stake. Yet, these figures are reported and they can give some valuable insights into the markets.

It is usually the fact that non-reportables tend to buy and sell from the non-commercial groups.

Below is an example of how the CoT report looks like.

TE10 01 CoT Report Sample

Example of the Commitment of Traders Report

 

Types of positions reported in the CoT report

Besides the three categories, the Commitment of Traders report comprises of three sections.

  • Open interest: The open interest indicates the net aggregate positions in the futures markets. The open interest is the current sum of all the open positions held by the reporting institutions. Therefore, if you are long on a commodity and the position isn’t closed, it would reflect in the open interest. By compiling both the long and short open interest, one can deduce whether the open interest is bullish or bearish
  • Change in open interest: As the name suggests, the change in open interest tracks the changes on a week to week basis. The change in the open interest is an important section. It reflects the change in the open positions and infers whether the markets are on the long or the short side.
  • Spreading: This is also known as spreads. The term might be a bit confusing for some because spread might infer as the difference between the bid and ask prices. On the contrary, spread is nothing but a different way of reporting. For example, if a trader has 200 long positions and 50 short positions, then the spread is reported at 150 while the short positions will show 50. Spreading is simply a measure of the extent to which a non-commercial position has in terms of equal long and short positions.

What can the CoT report show you?

The CoT report is used to report the positions in the futures markets. But the information can be used to trade the currency or the spot markets too. This is when you follow the CoT report for the currency futures markets.
It tells you the actual positions in the institutional side. When you compare the trends in the market to the CoT report, you will find distinct similarities between the report and thet rends.

Read 881 times Last modified on Saturday, 03 August 2019 07:56

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