The cot charts forex medium and long term traders employ give a unique insight into where the market is heading for all traders…
Question: if you went to a race track where you knew certain of the races were rigged in favour of the big punters, and you were given an opportunity to know which races had been set up in favour of which horses….
…. would you take advantage of this insider information or not?
Well, if you did you would likely be engaging in an illegal activity.
But what if there was another kind of race track where you were legally given a heads up on which way the big dogs were betting? It would make sense for you to it least be aware of this information, yes?
As it turns out, in the forex market you actually do have such an opportunity. It’s called the Commitments of Traders (COT) report. Released by the Commodity Futures Trading Commission (CFTC) every Friday at 3:30 EST, the report details the positions of the major players in the markets on the preceding Tuesday. All of the major forex currencies are covered, as well as a host of commodities, gold, silver and so on.
The report splits the holdings of participants in the selected market into 3 groups: the Commercials, the Speculators, and the Small Traders (sometimes referred to as the “dumb money” for their habit of often being on the wrong side of the next major price move!)
The Commercials refers to the group of extremely large traders who are actively involved in the provision of the commodity, currency etc in the marketplace, or they have contracted to take future delivery of the underlying instrument.
The Speculators represent the group of very large traders who have no interest in the underlying commodity or instrument itself, but are only involved in trading the market in order to make a profit on the actual trading.
The Small Traders are similar to the Speculators except that their position sizes are as you would guess, much smaller than the Speculators.
The power of the COT report lies in the fact that taken together, the positions of the participants represents the overwhelming bulk of interest or trade in the associated instrument. It is therefore argued that, knowing the positions of the major players, we can deduce which way price will run next.
The most often cited example is when the commercials’ and speculators’ positions are at opposite extremes. In this situation something has to give, as both the major buyers and the major sellers are fully committed to their current position and therefore cannot profit without exiting their trades in the opposite direction. An example will help here…
The following chart is from a very cheap but excellent COT subscription service (COT futures.com, link below). Note the scale across the bottom of the chart. This refers to the weeks of offset from January 1 in the current year.
You can see an example (around the 25 weeks mark) of when the commercials and speculators were at opposite extremes on the AUDUSD. Shortly thereafter both sides reversed to the opposite extremes. This coincided with a sharp reversal in fortune for the AUDUSD as the commercials liquidated positions and the speculators went long, resulting in the AUDUSD rising in price.
The cot report is powerful information, but like many things in the market it is open to interpretation. If you are going to incorporate it into your trading you would be well advised to do further research. As usual the Internet is full of conflicting and confusing information regarding forex cot charts.
Over the years I have researched the various resources. The following represent the ones that I have found to be simple to understand, cheap, and should give you all you need. They have been involved in provision of data and training for many years now. Please note that I am not in any way affiliated with these businesses, the links are provided for your information only:
I highly commend a study of the forex cot reports to any trader. Even if you decide not to incorporate this information into your own trading, it is something that you really need to be aware of.
Another source of data that can help traders with regards to the macro view in the forex market is the Bank for International Settlements (BIS). Click to go to the Bank for International Settlements (BIS)