The COT report or commitment of traders report is provided by the Commodity Futures Trading Commission and is an excellent tool for forex and commodity traders to analyze what other participants are doing in the market. The COT report is published using data from Chicago and New York futures exchanges every Friday at 14.30 EST and is split between three groups; Commercial traders (typically hedgers), non-commercial traders (such as hedge funds and speculators) and non-reportable traders (such as retail traders).
Why use the COT report?
The COT report provides a way to see what the big players are doing in each market. By doing so we can find extremes in open position data and identify possible reversal points. For example, let's say that the COT report shows the majority of traders in a market are holding long positions. If the majority of traders are already long and the market has gone up, it's illegally that there are many bulls left. That means when short traders enter the market it's likely to drop.
Commercial vs Non-commercial
Another way to spot reversals using the COT report is to watch when positions data between the commercial traders and non-commercial traders diverge. Commercial traders are typically big market players that use the market to hedge. A big gold company for example will enter the market to hedge their business exposure against gold. While non-commercial players such as hedge funds will buy or sell outright positions looking to profit from directional movements. Commercial investors tend to trade differently to non-commercial investors. They usually become more bearish at market tops and bullish near market bottoms. Non-commercial traders on the other hand like to buy into trends. They are there before shown to be at their most bullish as the market peaks and most bearish when the market hits at bottom.
At times when commercial players are predominately long and non-commercial traders massively short, or vice versa, there is strong divergence, an indication that it is probably a good time to buy or sell the market.
Finding the COT report
You can find the COT report by going to the CFTC website and downloading it every Friday. Or, you could jump over to forex broker, Oanda, which provides a couple of different tools to measure open position data, including data from the CFTC and their own customers positions. Take a look at the below tool from Oanda and you can find where traders are predominately short or long any of the main forex pairs or gold. Notice that when non commercial traders move to one side of the trade the market often turns around and goes the other way. Using the COT report is not a foolproof strategy but combined with other analysis can help you make some good money in the forex markets.