Commodity Trading: Commitment of Traders (COT) – Who, What, Why and When
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April 8, 2009
By: Matthew Bradbard
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In the last few weeks I have received several inquiries from existing and prospective clients. They are curious to know if I look at the commitment of traders (COT) report and if I view it as a useful resource for commodities trading. The answers are yes and yes. There are so many useless reports that are issued, however the COT is an excellent source of information. I have chosen to write a brief explanation hoping that some of the questions these individuals had may be answered. As well if there is a topic in commodities that you are having trouble grasping, we take suggestions into account when choosing our topics.
The Commitments of Traders (COT) report provides a breakdown of open interest for commodity markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.
Reports are available in both a short and long format. The short report shows open interest separately by reportable and non-reportable positions. For reportable positions, additional data is provided for commercial and non-commercial holdings, spreading, changes from the previous report, and percentage of open interest by category, and number of traders. The long report, in addition to the information in the short report, groups the data by crop year, where appropriate, and shows the concentration of positions held by the largest 4 and 8 traders. The supplemental reports show aggregate futures and options positions of non-commercial, commercial, and index traders in 12 selected agricultural commodities.
The COT needs to be inspected every week, but traders need to be careful not to read too much into the numbers or over analyze. This report essentially tells traders how others are positioned and the why is left to interpretation. It’s good to know what everyone else is trading in the markets. It’s kind of like sitting at the casino and every time, just before it’s your turn, the other players have to turn and show you their hand. Given that information do you think you would be a better poker player? Sure, you may not know what the deck holds, how many decks are in the shoe or what the other players are going to do on their turn, but at least you have an idea of what hand they hold. The COT provides useful information to traders and can be valuable, helping to formulate a successful trading plan. Recognize the COT is worth taking a look at every week, but that‘s not to say that valuable information will be in the report. See below an explanation on the COT.
Making sense of the COT:
Commercial – Describes an entity involved in the production, processing, or merchandising of a commodity, using futures contracts primarily for hedging.
Concentration Ratios (long form only) – The report shows the percents of open interest held by the largest 4 and 8 reportable traders, without regard to whether they are classified as commercial or non-commercial. The concentration ratios are shown with trader positions computed on a gross long and gross short basis and on a net long or net short basis.
Long report – Includes all of the information on the short report, along with the concentration of positions held by the largest traders.
Non-commercial (speculators) – Traders, such as individual traders, hedge funds & large institutions, who use futures market for speculative purposes and meet the reportable requirements set forth by the CFTC.
Non-reportable positions – The long and short open interest shown as “non-reportable positions” is derived by subtracting total long and short “reportable positions” from the total open interest.
Number of Traders – To determine the total number of reportable traders in a market, a trader is counted only once whether or not the trader appears in more than one category (non-commercial traders may be long or short only and may be spreading, commercial traders may be long and short). To determine the number of traders in each category however, a trader is counted in each category in which the trader holds a position. Therefore, the sum of the number of traders in each category will often exceed the number of traders in that market.
Open interest – Open interest is the total of all futures and/or option contracts entered into and not yet offset by a transaction, by delivery, by exercise, etc. The aggregate of all long open interest is equal to the aggregate of all short open interest.
Percent of Open Interest – Percentages are calculated against the total open interest for the futures only report and against the total futures equivalent open interest for the options and futures combined report.
Reportable positions – The futures and option positions that are held above specific reporting levels set by CFTC regulations.
Short Report – Shows open interest separately by reportable & non-reportable positions.
Spreading – For the futures only report, spreading measures the extent to which each non-commercial trader holds equal long and short futures positions. For the options and futures combined report, spreading measures the extent to which each non-commercial trader holds equal combined long and combined short positions.
Supplemental Report – Based on the information contained in the report of futures and options combined in the short format, the supplemental report shows an additional category of “Index traders”. These traders are drawn from the non-commercial and commercial categories. The noncommercial category includes positions of managed funds, pension funds, and other investors that are generally seeking exposure to a broad index of commodity prices as an asset class in an unleveraged and passively managed manner. The commercial category includes positions for entities whose trading predominantly reflects hedging of otc transactions involving commodity indices; for example, a swap dealer holding long futures positions to hedge a short commodity index exposure opposite institutional traders, such as pension funds.
Using the COT for trade purposes:
You may or may not have heard about the COT report; it has been around for many years. This report should be used as a tool and implemented into your trading strategy but by no means should the COT be the only resource traders use to make trading decisions. Once in a while when categories get to extremes the COT may aid in your decisions.
The basic significance of the COT is that it provides a line up of who the players are in the futures game: commercials, large speculators, and small speculators. It also shows what position they have (buying or selling).
I believe, with some experience, the COT can be used by the individual trader. The key is to see if anything jumps out as an abnormality. Keep it simple and apply the statistics for what they are, nothing more nothing less. Look for a significant increase/decrease in open interest. Compare analyses with the individual charts of the commodities and see if they are telling the same story. What if anything does a change in open interest or volume tell you? What is the overall trend in the underlying commodity? Is there a seasonal tendency or any historical data that indicates an impending move?
The main thing I want traders to take away from this is they generally want to be positioned on the same side as the “big boys” that have the ability to move the market and ride their coattails. Commodity traders that invest and trade side by side with the largest commercial interests in the world, in my opinion, increase the odds of being successful. That is not to say that trading against the commercials or having a contrary opinion is not sometimes prudent because swimming against the tide can often work but generally the reality is that when sitting at the table the man with the deepest pockets usually wins. There is no secret path to riches in commodities or any market for that matter but the COT should help in making sense of commodities trading and assist in answering the who, what, why and when.
Click Here for Pit Bull: Lessons from Wall Street’s Champion Day Trader
Click Here for More Commodity Trading Information by MB Wealth
To find out exactly how we are positioning our clients in commodity futures and options,
Contact us today at 1-888-920-9997. Don’t forget to tell them The G Manifesto sent you.
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________________________________________________________________________________________________________Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.
