Commitment of traders — the COT reports

The commitment of traders report is a little different from the previous indicators. It doesn’t measure any economic indicator, but merely states the holdings of commercial and speculative participants in various futures markets which are mostly concentrated in New York and Chicago. The report is released every Friday by the CFTC (Commodities and Futures Trading Commission) and reflects the commitments of traders on the prior Tuesday.

The COT report divides traders into three categories: commercial, non-commercial, and non-reporting. The group “commercial” mostly includes commodity producers (in the case of forex, exporter firms) who use futures to hedge against future price movements (in other words, they would like to eliminate the impact of future price fluctuations on their profits or losses: the exact opposite of what speculators aim at). The group “non-commercial” includes speculators. Speculators have no interest in the actual commodity (be it forex, or lean hog) but merely desire to profit from price fluctuations. Finally, the group of “non-reporting” traders includes small speculators who are of significant market impact, and are therefore not required by the CFTC to report their positions.

What kind of use can the trader make of the COT report? When either speculators or commercial participants have positions that are extreme in comparison to the average of a predefined period, some traders assume the emergence of a small scale temporary bubble, and they will buy or sell to counteract the extreme long or short positions registered.

Others suggest that small speculators, devoid of the tools and knowledge of the bigger participants, are usually wrong, and act on this assumption by doing the opposite of what the non-reporting group does.

Another reasoning claims that the commercial group are likelier to be correct on their analysis as they have interest in and direct knowledge of the commodities in question.

In general, each trader is free to make his mind as to which of these theories he will subscribe to, and he may eventually choose not to use any of them. But in any case, basing one’s assumptions on strong fundamental reasons, rather than the positioning of any group in any market is the course of prudence. This is not only because a successful trader performs his own analysis, but also because the pockets of the large commercial and speculative participants are likely to be far deeper than that of the average trader: Performing proper research and analysis is always better than following anyone, or any indicator blindly.

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