×

Authorised and Regulated: FCA UK / SCB
×

How to Use the COT Report in Forex Trading?

How to Use the COT Reports in Forex Trading - Blackwell Global - Forex Broker

How to Use the COT Reports in Forex Trading - Blackwell Global - Forex Broker

Commodity traders are able to look into a special report released by the the Commodity Futures Trading Commission (CFTC) every Friday at 3:30 p.m. EST. This is called the Commitment of Traders report, also known as the COT report. It provides an overview of the positions held by both institutional traders and small speculators, across a broad range of futures markets.

This report is considered useful for forex traders too. In this weekly report, the CFTC segregates the total long and short positions held by participants into three trading groups. Knowing these positions can be useful for determining the overall market sentiment. A forex trader can then form long term trading strategies based on that.

Breaking Down the COT Report

The COT report shows data for both futures and options positions held by commercial, non-commercial and non-reportable traders.

  • Commercial Traders: Large multinational companies participating in the futures markets to hedge against risks in some other investment.
  • Non-Commercial Traders: This group consists of large-sized speculators, such as commodity trading advisors, retail and hedge funds and other financial institutions. They are interested in generating returns rather than hedging risks.
  • Non-Reportable Traders: They don’t fall into either of the above two categories. Mostly, they are the small and individual speculators, who might not trade in huge volumes, but are often known to trade against the trend.

Here are some terms you should be familiar with to decipher the report:

  • Long: The total number of long contracts known by the CFTC.
  • Short: The total number of short contracts known by the CFTC.
  • Open Interest: These are the contracts that haven’t been delivered or exercised.
  • Number of Traders: The total number of traders who are required to report their options and futures contract positions to the CFTC.
  • Net Position: The difference between those holding long contracts and those holding short contracts.

Importance of the COT Report for FX Traders

You might wonder why activities in the futures market would be relevant for FX trading. The reason is that a large percentage of the spot FX market is traded over-the-counter (OTC), and transactions are not recorded on a centralised exchange, like the Chicago Mercantile Exchange (CME).

The forex market doesn’t have a volume indicator, as a result. By tracking the currency and commodity futures allocations by large institutions and smaller speculators, traders can use the COT report as a volume indicator.

Some of the biggest global companies, who have access to real-time economic data, come to the futures markets to hedge their exposure to raw material price fluctuations. Forex traders can find this data useful in gauging the positioning of the market at a certain time.

Also, the report is useful for determining long term strategies, due to its lagging nature. It gives updates regarding the previous weeks’ positions, rather than just for a few days.

Evaluating the COT Report for FX Trading

Understanding the different players in the report can offer clues about price movements. For instance, non-commercial traders are usually price speculators and trade in the direction of the anticipated price movement. Commercial traders are usually in the market to lock in gains for clients rather than hedge risks, and they tend to place trades in a direction opposite to the expected price direction.

The non-reportable traders are contrarian traders, taking positions against both these categories. Understanding the net position can help judge market sentiment. Many traders concentrate on the non-commercial trader category, since they find their own interests aligned with these traders.

If the net position is negative, speculators and commercial traders are “net short.” There are more short contracts than long ones, which indicates an overall bearish sentiment. When the net position is positive, traders are “net long.” Here, the number of long contracts exceeds that of short ones, which means that the market has a bullish outlook.

The Concept of Open Interest

Open interest is vital information to look into. This represents the total number of contracts that have been entered into, but not yet executed. Futures contracts are derivative instruments, where two parties agree to make a transaction in the future, on a price decided upon today. When a contract like this is established, the open interest figure increases by a value of “1.”

However, open interest parametres have no relationship with price movements. For instance, a decrease in open interest does not indicate decreasing price levels. At the same time, it is important to check the changing value of the open interest. Contract owners can change. This means that contracts often get passed on to different parties, and when this happens, the open interest figure does not change. So, just because the open interest remains constant, it does not mean that the market outlook has not changed at all.

For instance, many long contracts held by small speculators can be acquired by commercial traders. So, speculators who initially expected the price to rise, have now changed their outlook and have sold their contracts to commercial buyers, who will trade against falling prices. Open interest didn’t change, but the market outlook did.

Open interest can also help track money flow in the market. If it is increasing for particular currency futures, it means that money is flowing into that asset. Moreover, an elevated interest is pushing the price higher, indicating a bullish trend. Similarly, if the price is decreasing, but the open interest levels rise, it indicates an overall bearish outlook or an upcoming downtrend.

Traders can also track the harmony in the positioning of commercial traders and speculators to confirm a trend. Both these classes of traders usually trade in opposite directions. This means that long commercial traders and short speculators should place trades in unison. Similarly, long speculators and short commercial traders need to place trades in unison. When they place trades in unison, the probability of the price moving with them becomes higher.

COT data is also used to determine whether interest is higher in risk currencies. Many forex traders use the data to pair strong currencies with weaker ones, to trade market reversals during mid-term trends. Technical indicator signals can be confirmed using the data, to see whether a majority of the traders think the same way you do.

The COT data is an important and versatile tool for forex trading. However, it is useful to use other fundamental analysis data to measure the validity of market volume.

References:

Start Trading in 3 easy steps
1
Complete the Application Form
It takes just minutes for us to verify your identity and set up your account.
2
Download MT5 Platform
Download MT5 and trade via your desktop, mobile or tablet. No minimum deposit required.
3
Start Trading
Trade more than 60 products (Forex, CFDs & Commodities)

 

Welcome to Blackwell Global

Blackwell Global operates across a range of jurisdictions, please see the options below.
Please see below the protections you'll waive by not continuing to the UK website.
switching to the global website.
By clicking Switch to Global website, you acknowledge the information below.

Best Execution

Protections you'll keep


Blackwell Global will ensure to always act in the best interest of our clients by offering a best excution policy across our wide range of trading products

Segregated Account

Clients funds will be stored in segregated client money accounts, we ensure security of funds With tier 1 banking parnters.

Balance Protection

Blackwell Global will uphold our commitment to clients by offering negative balance protection.

Leverage Restriction

You will not be protected by the leverage caps for retail clients under the FCA UK entity for CFD trading. 200:1 is the maximum leverage under our global entity. The protection of 1:30 is the maximum leverage under our UK entity

Restriction on Incentives
Restriction on Incentives

Clients and partners will not be protected by FCA restrictions on Incentives to retail clients and traders, Under our FCA entity no trading incentives may be offered.

Protections you'll waive

Start Trading Now

Tight Spreads from 0.1 pips

Trade Micro Lots

FCA Regulated

Segregated Funds

Personal Account Manager