Lesson 2: Importance of Commitment of Traders (COT)

In the previous lesson, you’ve learned the importance of market sentiments in the forex market. Let’s review,  

1. The overall market sentiments (market mood) tell you the potential direction that the asset may tread. 
2. If the market has positive sentiments, the assets are likely to be bullish. On the other hand, negative sentiment suggests that the market will be bearish.  

But here’s the question; how do you know the market sentiment?  

Well, using the Commitment of Traders (COT) can give you a clue on whether the market will be bearish or bullish.  

Lesson Highlights

• The Commodity Futures Trading Commission (CFTC) publishes the Commitment of Traders (COT) report every afternoon Friday.
• The COT report helps market participants like traders, hedgers, and large institutions gauge the primary market sentiments over the past week.
• Traders use the COT report to predict the potential market trends for the following week.

Understanding Commitment of Traders (COT) 

First, let’s define what COT is and how important this report is to traders.  

The Commitment of Traders, or COT, is a weekly report published by the Commodity Futures Trading Commission (CFTC). The CFTC publishes COT report on Fridays, around 2:30 PM EST.  

You may, “for what purpose?”, “do they just release it out of whim?” 

Well, no. The COT report is published to help the market participants in analyzing the market sentiment that prevailed over the past week. 

The CFTC includes data like the trading volume and the open position data changes. With such data, the COT signals market reversal by telling you how the market participants position themselves in the market. 

1. The positive net position suggests that most of the traders are long on the currency. 
2. The negative net position indicates traders are mostly short on the currency. 

Who are the forex market participants?

You might need to read more TradeGeek lessons if you think that the forex market is only for online traders. In fact, individual traders are only a minority in the financial market. 

Here are the common market players: 

1. Hedgers 
2. Large Speculators 
3. Retail Traders 

When you’re trading with the market sentiments, you need to consider the market behavior of these participants. Not only of one participant– all of them.  

Why? Because like the usual team setup, each player plays unique roles and has different characteristics. Their uniqueness contributes to their overall sentiment; hence, you should factor them all. Here’s your reference: 

Legacy COT Report

Among all the types of COT reports, the legacy COT is most familiar among all traders. It carries the fundamental concept of a COT report, which provides data on open-interest positions of all major contracts with 20 or more traders.  

The legacy COT breaks down the short, long, and spread positions for individual, commercial, and non-reportable (small) traders. Additionally, the COT report provides the sum of all open interest and all changes.  

You may ask, “isn’t COT report for futures trading only?” 

Well, since forex trading can be linked to the futures market, COT reports can be used for trading currency pairs that have futures contracts. Here’s the majors that you can trade with the COT report;  

1. EUR/USD 
2. AUD/USD 
3. GBP/USD 

The legacy COT gives you an overview of what the key market participants think and the possible continuation or cessation of the prevailing trend.  

Beginners can use COT reports

COT reports are not exclusive for experienced traders; in fact, they are invaluable tools for every beginner trader. Analyzing COT reports will give you an idea about the market dynamic and its potential trends.  

Also, factoring in the COT reports when making trading decisions saves you from being on the wrong market side. 

How do you read COT reports?

The COT report looks like a giant gobbled-up block of text. But don’t fret! There’s a simple way to use it. 

The reports are read as tables, with each row and column labeled appropriately (see the example above). The information in the report indicates how much interest there is, both long and short, in various derivatives contracts and which type of market actor is involved.