Small speculators are not the investors making most of the money in the futures markets. They are actually the habitual losers in futures trading. The commercials and large speculators make the majority of the profits.
It only makes sense, because commercials are in the business and probably know commodity prices better than anyone else. Large speculators are normally professional traders who have been involved in the futures markets for years and they have very sophisticated trading programs and research. The small speculator probably trades part-time with a small account and does little research.
It should be no surprise why small speculators have a difficult time competing against the professionals. Trading on emotions is probably the biggest problem facing small traders. They typically have less confidence in their trading plan, if they have one, and they are quick to change positions or hold on to the bitter end.
Commitments of Traders Report (COT)
The COT report can help turn the table for the small speculators. The report summarizes the amount of positions that the commercials, large speculators and small speculators are holding. It also states whether they are increasing or decreasing their positions from the previous week.As a rule of thumb, you want to trade with the smart money – the commercials. They are typically right about the market direction, while the small speculators are typically wrong. You will usually see the small speculators holding large net-long positions at market tops. At the same time, the commercials are probably betting the market will move lower. It is usually wise to not trade against the smart money.
