Commitment of traders, the big boys play book

As you may know retail traders only make up a fraction of the 6.6 billion dollar forex market. Big financial institutions such as banks and hedge funds open large positions within the market which then determines the direction of the market. As retail traders it is then in our interest to trade along with these market movers and benefit but how are we to know what these big financial institutions are doing？ That is where the Commitment of Traders (COT) report comes in. In this article we will be giving a short overview of what the COT report is and how to use it.

The COT report is mostly useful for determining large scale market movements which may last weeks and months so it is best to find a broker which has the cheapest overnight and over weekend charges for open positions. For finding such a broker I recommend you use WikiFx. This app shows you which brokers are regulated and verified ensuring that you don't have to deal with broker misconduct. And if for some reason you are having issues with your current broker you can report the issue to WikiFx and they will help you recover your money. They will help you find the appropriate broker with the lowest fees. So now that you know the time frame you should associate this tool with let us look at what the COT report actually is

What is the COT Report

The COT report is released by the Commodity Futures Trading Commission (CFTC) every Friday and it shows the open interest/positions on all stocks, CFDs, currencies and metals of different types of market participants. The two types of market participants are Commercial participants and Non- Commercial participants. Commercial participants are hedgers or companies that deal in the commodities that are being traded,e.g. Shell with oil. They use buy or sell positions to mediate their risk within these markets and are not given any limits on how large of a position they are to open. Non-Commercials are the speculators and they are in the markets to take risk on, so as to make a profit. These are known as the trend riders and they do have position limits.To ensure the public is aware of the positions these large institutions are taking both these participants by law are supposed to report their open positions to the CFTC every Tuesday. The CFTC then compiles this information then releases the COT report on Friday evening.

How to use the COT

Because we now see the positions of the big financial institutions we want to identify when these institutions open extreme positions (historic highs or lows) as this signals that the trend is about to change. We also look for points where these financial institutions will change their position from long to short or short to long as this also indicates that the trend is about to change. The whole idea here is to follow the big boys as they buy or sell position and benefit from the resulting market movement. You can access the report online by simply googling Commitment of Traders and clicking on the CFTC website. Scroll down a few times till you arrive at “Current Legacy reports”. Click on the Chicago Board of Trade, “Short format” button on the futures only table and then you will access the report. When you get there, search for the commodity you are looking for and there should be a report showing the positions of commercial and noncommercial participants. The issue is this report is now really user friendly so it might be best to visit some sites which will offer the cot report in a much readable illustrated format. Just simply browse a few and choose which one you like the best.

Remember this report is mostly useful for determining long term market direction. Day and scalp traders will struggle to use the COT report as these reports arrive three days after the positions are reported. It is to be used along with technical and fundamental analysis to finally arrive at a conclusion about the direction of the market. Of course we have not covered all the facets of using the COT report as we would be here all day, but if this sounds like a tool you want to include in your trading then we hope this was a useful introduction