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This is the final part of a three-part series on the COT report. If you have not already, you are strongly encouraged to read Parts 1 and 2 before reading Part 3.
The focus here will be on the foreign exchange market (Forex market) and how foreign exchange traders use this report in their trading and investing.
The CFTC (Commodity Futures Trading Commission) COT report is one of the few ways traders can access a weekly snapshot of reportable open interest between commercial (‘Producers’) and non-commercial traders (‘Large Speculators’). Small speculators (Nonreportable Positions) are largely ignored as they bring little to the table regarding forecasting use. Commercial traders represent the ‘hedgers’ of the market; these producers use futures and options to hedge for risk purposes, and they know their business well (sometimes also referred to as the ‘Smart Money’). Large speculators tend to be trend followers who are in the market for profit and are not looking to take delivery of the underlying asset. Many also classify these traders – hedge funds and Commodity Trading Advisors (CTAs), for example – as ‘Smart Money’, often following market moves well.
Below, you will find the EUR/USD daily chart (produced using TradingView) with the COT data applied in an easy-to-read format for the net open interest futures positions of commercial traders and non-commercial traders up to the most recent report as of writing.
One popular way of implementing the COT report to help with trading is to focus on net long and net short positions of commercial and non-commercial traders and seek ‘extreme positioning’ in traded markets. For example, if a trader is interested in entering long (buying) EUR/USD, and net shorts for euro futures are at their highest in 6 months, this suggests that euro shorts could be overextended, and large sellers may soon look to unwind these positions. This helps bolster the case for a long entry into this market. Extreme positioning implies that the majority of the market is already short the currency, and thus, in theory, not many are left or are willing to sell the market, which, in and of itself, might indicate that a rebound may be seen. A notable change in economic data for the euro or monetary policy from the European Central Bank can trigger an unwind in positioning.
Unfortunately, the COT data in raw form is somewhat challenging to implement. To read the COT data more easily, several providers offer alternative ways of viewing the COT data. For example, TradingView provides several custom-built indicators that deliver the net-positioning COT data for commercial traders and non-commercial traders.
The euro FX CME positioning data table (shown below from the Legacy report for the futures market [Short Form]) shows that large speculators are net long by 4,590 contracts and commercial traders are net short by 22,279 contracts. Based on this table, obtaining historical reference is difficult, and it would be problematic to gauge extreme positioning. Hence, traders often employ an alternative way of displaying COT data on TradingView showing the current and historical net positioning (as above).
Finding extreme positioning in your traded markets can be challenging as there are no defined thresholds like those we have in some technical indicators, such as the Relative Strength Index (RSI) or the Stochastics Oscillator.
Based on the EUR/USD daily chart below and the euro net positioning data for commercial and non-commercial traders from the COT report, previous ‘extreme’ levels are visible. You will also note that as commercial traders and non-commercial traders reach (and sometimes surpass) these previous extreme levels, a market turn may unfold. Take the first example back in 2012; commercials had a huge net long position of 262,000 contracts, while non-commercial traders were net short by 212,000 contracts; with these signals, we subsequently saw the EUR/USD currency pair bottom at $1.2042, not long after.
As you can see, the net positioning of commercial traders and large speculators has a strong inverse correlation (as one reaches an extreme, the other reaches an opposite extreme; as large speculators buy into the trend, producers sell at higher prices). Because of this, some traders focus only on the positioning of large speculators to gauge extremes.
Another way of looking at the COT data is to employ basic support and resistance areas on a price chart to help assess the validity of any extreme positioning. By way of an example, following the bottom formed in 2015 around $1.0481 for the daily chart of the EUR/USD (below), where large speculators reached an extreme net short position of around 227,000 contracts, price action eventually rallied higher until reaching circa $1.2500, which was also an area of support and resistance. Accompanied by this resistance was extreme net long positioning from large speculators of about 150,000 contracts, consequently adding weight to a turn lower.
Some traders and investors also follow large speculators until a potential extreme level is reached; these traders follow the larger players and generally look to trade with the trend.
1. How do I find straightforward COT data with history?
Although historical references are available on the CFTC website, many software providers have done the legwork for you, extrapolating the data in an easy-to-read format. Many traders use TradingView, which offers several custom-built COT indicators similar to the one in this article.
2. How can I use the COT data in my trading?
Seek points where positioning between commercial and non-commercial traders is at extreme points, as this can forecast a potential turning point in your chosen market. There are many ways in which a trader can use the COT data.
Nevertheless, it should be noted that COT data should not be traded in isolation. It is not a perfect indicator and does not guarantee that you can pick tops and bottoms in markets. The data should be used to complement a trading strategy.
3. Can I use COT data for other markets?
Yes, COT data is not limited to Forex markets. You can use it to help trade interest rates, commodities and stock indices.
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