Categories of The Commitments Of Traders Report
We first have to look at the three major categories of traders included in the reports. The Commercials are considered those who are in the business of the particular commodity. Think of Hershey’s buying and selling cocoa futures, as cocoa is a main ingredient in their chocolate bars. The Commercials are mostly hedging to control the risk against sharp increases in raw material costs.
The Large Speculators are normally considered to be hedge funds or managed futures funds or those who manage large sums of money. As the title indicates, they are purely speculating on the price of a commodity rising or falling. Large Speculators normally follow trends and they are typically responsible for most of the movement in commodities, especially when the markets move to extreme levels.
The Small Speculator is the third category in the reports and probably the least significant. The Small Speculator is typically consists of the retail traders who trade only a few futures contracts at a time. Many use this category as a contrary indicator, since the small trader is normally on the wrong side of the market. Recently, there seems to be less significance to that theory.
How To Use The Commitments Of Traders Report
The Commitments of Traders report is released by the CFTC every week, normally each Friday at 3:30 EST. You can access the reports at their website -http://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm. It details the positions held as of the prior Tuesday for each market. There is a lag of a couple days, but that is the most updated as you’re going to get.
There are many strategies for using the COT report. Most of them involve following the Commercials as they are considered the smart money. You don’t necessarily want to look at whether the Commercials are long or short, rather, you want to follow whether they are increasing or decreasing their positions. Looking for extremes in position sizes from the normal range is also a popular tactic.
The Large Speculators, or hedge funds, have a great deal of firepower. It is often worthwhile to follow the their flow of positions to see if they are steadily buying or selling. If they reach the high end of the range for amount of positions held on one side of the market, there is a good chance the market is may turn soon.
Stephen Briese has written a good book - The Commitments of Traders Bible. He is considered one of the authorities on trading based off the COT Reports and he does an excellent job of explaining COT trading strategies.
The COT Reports contain very useful information for commodity traders, but it is not a surefire way to make money trading commodities. Many traders use it to confirm their market research or other strategies they use to trade commodities.
