The Commitment of Traders (CoT) Report details the positions opened on the main future markets by the three main categories of financial operators.
The Commitment of Traders Report (CoT) analyzes the behavior of financial markets and is one of the most widely used tools by international operators.
Institutional Investment Funds (Commercial), Speculative Funds (Non-Commercial or Large Speculators) and Small Traders (Non-Reportable Positions).
The first category is made up of mutual funds and large investment banks, while hedge funds belong to the second category.
There are two versions of the CoT, the first showing only open positions on futures. The second showing open positions on both futures and options.
The CoT Report shows you the positions, both long and short, opened by the various categories of investors.
In practice, it shows whether a certain operator has increased or decreased its exposure to a certain financial asset.
The CoT Report also shows the change from the previous survey week.
By analyzing the data in the CoT Report, you can determine what the expectations of each type of investor may be.
You can also verify how the various investment funds have changed their positions in the market.
The Cot Report Categories
Before going into detail about the various information provided by the CoT Report, it is necessary to know the characteristics of the various operators.
Commercials have a contrarian approach to the market. They increase their long positions when the market is in a bearish trend. In a bullish trend, instead, they increase short positions.
The reason for this behavior is that these entities operate on the derivatives markets for primarily hedging a position they may be held in the underlying asset.
They hedge any long positions on equity securities, for example by opening short positions on a derivative of the equity index.
Larry Williams has written a very interesting book on CoT analysis, Trade Stocks and Commodities with Insiders.
Larry Williams explains that often Commercials reach maximum long exposure when markets are at the end of a prolonged bearish trend and are forming a significant medium-term minimum.
Non-commercials often adopt trend-following strategies. They increase their long positions when the market is bullish and increase their short positions when the market is bearish.
The Non-Reportable Positions, i.e. small traders, favor directional operations.
Often, however, they cannot catch the reversal signals and find themselves with a high long exposure when the market has reached a significant top.
Likewise, they can be found with high short exposure when the market has reached an important medium-term low.
The CoT Report trading system
One of the most used techniques is that of researching the various markets for a bullish/bearish sentiment extreme situation.
There is talk of CoT Extreme when there is an extreme level of long/short positions between the various operators.
As we have seen, in fact:
Non-Commercial and Commercial are always on the opposite side: if the former is upward, the latter are downward and vice versa.
Non-commercial is almost always on the right side of the market. Except during a trend-inversion Non-commercials are caught unprepared because they are excessively unbalanced.
The CoT Index Oscillator
The Commercials are almost always on the wrong side of the market, always except in times of trend reversal.
Some analysts use an oscillator called the CoT Index.
The latter converts the net position of the Commercials in a range between 0 and 100. The calculation form is:
COT index = 100 × (Current net position – Minimum level of the net position) / (Maximum level of the net position – Minimum level of the net position)
The formula allows identifying the net position of the Commercials within a “historical” range of oscillation.
A CoT Index at 90, for example, shows that Commercials are in a high position on the highs of the last few years.
A CoT Index at 10 shows that Commercials have a high downward position, on the highs of recent years.
The CoT Index is, therefore, a very useful indicator for identifying significant maximums and/or minimums, in the medium term.
In particular, it allows identifying “extreme” situations in which the big operators find themselves with important upward or downward positions built through futures.
The CoT report is circulated weekly by the American government and is updated every Friday.