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Trade Like A Forex Titan (The COT Report)

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Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!

Today we are going to be talking about a extremely important part of the forex puzzle known as the commitment of traders report or the cot report for short. The COT report is a weekly updated sentiment report that can provide us with important information on the positioning of currency pairs.

The cot report is Issued by the Commodities Futures Trading Commission known to most as the (CFTC). And It can be use in conjunction with a trader’s underlying trading strategy in order to enhance results.

The COT report offers us statistics of the positioning for futures traders across a wide range of markets, and it is quite often used as a proxy for the Forex trading market.

Within the weekly report, the CFTC gives us The amount of long and short positions and overall open interest according to three separate trading groups.

Surmising this data especially over long periods of time and assessing for changes in average position changes can prove valuable for us in terms of building ideas of strength and weakness to come within certain currencies.

The largest futures traders in the world are required to report their positions to the CFTC. The positions can be easily tracked due to the margin they must pay to hold their large positions which the CFTC has been publishing since 1962. Even though the information is slightly lagging do not underestimate its extraordinary value.

The reports are released every Friday at 3:30 pm eastern time. This information is very valuable to traders due to the nature of groups that come into the futures market.This includes institutions like hedge funds who enter to make a return above their respective index.

Some of the largest companies in the world with real-time data reflecting the health of an economy come to the futures market to hedge their exposure to price fluctuations of raw materials that they use to make their product. This allows traders to gauge the positioning and sentiment of the market at that specific time.

we mentioned earlier about the 3 groups included in the cot report so let’s talk about these groups a little bit.

Firstly we have the Commercial Traders!
These are most commonly large multi-national corporations with a commercial hedging interest in their respective futures markets. For example, a large Japanese manufacturer may want to hedge their exposure to fluctuations in the USD/JPY exchange rate.

Secondly we have Non-Commercial Traders! the figures shown here often relates to large speculators such as Commodity Trading Advisors and similarly large institutions speculating in specific futures markets.

Lastly we have Non-Reportable Traders! Non-Reportable Traders are traders who don’t fall into either pre mentioned group. Most often they are likely to be small speculators, they are less significant in COT report analysis as they don’t control a large enough piece of the market collectively.

Application!

Let’s now look into How we can use the cot report to trade. The market can have short term bullish behaviours in a long term bearish downtrends as reflected by abnormally large retracements on our charts.

The report is designed to gauge the supply and demand of key market participants. We can use it to confirm mid/long term fundamental bias in a given market.

A Decrease or flat non-commercial long positions on rising prices might suggest the end of a bullish trend. Traders should seek to enter a short setup near prominent resistance. An Increase in short non-commercial positions on falling prices might support the downtrend.

Some traders may look into Hedgers behaviour and analyse their positioning in the market. Some traders believe that these traders are the biggest in the market therefore know the market best.
Other traders would analyse Speculative positioning. And additionally traders like to look at both groups open interest. In most cases, they would generally be opposite.

There are many ways of looking at this data but let’s discuss extreme level swings and net positioning.

In Extreme levels swings There is a strong correlation between multiyear high or low positions and market swings.

On this chart we analyse EURUSD and the EURO FX Commitments of Traders data. Commercial traders were at multiyear low or high levels right before the price lost momentum and reversed. We generally want to wait for the highest or lowest level in 3 years to consider entry of a long term reversal.

The Commitments of Traders is not a market entry tool but sentiment analyser.
It will indicate the current trend is about to end but usually it is likely to continue on before its reversal. We never know how far As the market’s participants are always growing over time and it may be difficult to predict the exact top or bottom.

Our entry can always be chosen using technical price action signals. These could be anything and individual to your trading strategy. Examples include candlestick analysis on daily or weekly charts such as double tops, divergences or anything else provided it has proven reliability and suits your trading style and strategy.

Next we have Net positioning!

Net positioning is a arguably more accurate and reliable method compared to the extreme levels strategy. In this method we prioritise thinking about trend change if the Speculative positions turn NET long or NET short.

Speculators will be NET LONG if their long positions exceed short positions. In other words, They will have a higher long balance than short. On this example speculators are holding more short positions (123,149) than longs (101,277) meaning they are net short.

On this chart we see how the Speculators turned bullish or bearish on a multiple occasions. Every time this occurred the price reversed and followed the supply or demand law.

When the speculators turned net long or net short the price climbed or fell substantially in its relevant direction. Again please remember this is not a tool for entry. Market entry should be determined using our other technical indicators to increase our chances of success.

Summary

The COT report is not a market entry tool. The Markets trends can be short term bullish in a long term downtrend and this promotes keen observation around the speculators statistics.

We can use the COT report in order to gauge supply and demand of the most important market participants and we can use it to confirm mid/long term fundamental bias in a given market.

Now take some time to think about these concepts we have discussed, how they apply to the forex markets and how you may apply them in future, please sit back and contemplate what you have learned today and remember Contemplation is the key to learning.

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