What is that?
It is a report generated by the Futures Trading Commodity Commission (CFTC). The CFTC is an American federal agency and anyone who is in the futures market and trading above certain levels is required to report their positions to the CFTC.
Each week the CFTC collects all this data and creates a report called COT.
This report includes all the data of the operators, the Open Interest of all the months of the contract for each futures.
Here is the link to be able to download and see: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm
For example if we take corn, the report will take into account not only the contracts of the current month but also the other maturities that are still traded but not as actively traded as the previous month. In effect, we will have an “overall” view of all the contracts open at that moment on the underlying chosen.
The COT gives you information on three different categories of intermediaries:
- Great speculators
- Small retail speculators
Therefore, each category must report to the CFTC every position taken on each contract. The data are also connected abroad and therefore foreign brokers are also taken into consideration.
The information within the report is compiled every Tuesday at the close of the day and the report is then processed on Wednesday and released on Friday evening. So we will only have the data released by the CFTC on Friday night 🙁
In fact, a data is released that at the time of release is delayed by a few days, in this case no Trader would use this signal as real-time trading (having already been processed it may have already been discounted on the same day or on Tuesday) but it can be used as further confirmation of a trend (bullish or bearish) or as confirmation of a trade in progress.
This report provides transparency and clarity on the market. Furthermore, it provides very useful information regarding the 3 distinct categories of traders and their “forecasts” on where the market will go.
But who are these market players?
The report makes the three categories very clear so it is important that we understand each of them.
They are those who have an interest in the commodity itself, who are interested in hedging their assets by buying on the futures market, the thing that these Commercials are interested in is not so much the performance of the futures they are buying as the performance of their business that has to do with the reference commodity.
Example: let’s say you have a company that is very linked to corn like Kellogg’s for example! As a company I am interested in trading on the futures market to guarantee some prices at which I will then go and sell my Kellogg’s.
This is how companies protect themselves from price fluctuations, the thing that matters most to them is the business they are doing not what the commodity is doing, as you will notice Commercials will often go against fashion (trend), you will notice that commercial numbers are often inversely related to the general market trend.
They are large speculators, institutional investors, hedge founds, who have no commercial interests related to the commodity, meet the reporting requirements of the commercial dimension and trade only to take advantage of market movements in the short to medium term.
Speculators are traders who hold or control positions in futures or options in futures that are below the reporting level, as non-commercials trade only to profit from market movements.
Now that we have examined the various players in the game, we just have to figure out WHO TO FOLLOW. But will it be easy? There are many schools of thought and books that speak only of this.
There are those who follow the COMMERCIALS because they believe that as they deal with the raw material themselves, they also know the dynamics of the market and their behavior.
Those who follow the NON COMMERCIALS as they believe that they, being great speculators, know better about price fluctuations, volatilities and as they move large sums of money we have some more knowledge.
As for the SPECULATORS generally most of the time they are on the wrong side of the market and will eventually lose their money.
In the next articles we will see some indicators and systems based on the COT, we will understand who to follow, how to follow and the world in which to operate for a profitable trading.
Thanks for your attention.