COT basics

The Commitments of Traders (COT) reports show futures traders' positions at the close of (usually) Tuesday's trading session. The report is prepared by the Commodity Futures Trading Commission (CFTC), a U.S. government body with the task of overseeing futures markets. The report's goal is to create transparency and fight market manipulation. Also, it is an excellent trading tool.

Traders are grouped into categories and the number of contracts they hold are added up. All COT reports show how many long and how many short contracts do traders of each category hold. The COT report that is the most well known is the one that is in publication since 1986 (its predecessors go back to 1924) - the Legacy report. It breaks down the market into three major categories, the Commercials, the Large Speculators and Non-reportables (who are the small guys, Small speculators)

Yes, CFTC publishes four kind of COT reports:

1 Legacy (or Classic) Reports

The original COT reports, dating back for most futures contracts to the 1980’s. For trading purposes, these reports are the most useful, because of their long history and proven edge.

2 Disaggregated and Traders in Financial Futures (TIFF) reports

New reports introduced in 2009, with different trader categorizations. Since its history is short, meaningful statistical testing cannot yet be made to find out its usefulness.

3 Supplemental Commodity Index or CIT reports

Has more history than the disaggregated reports, but still not enough, especially compared to the depth of the legacy reports. It was constructed to show the positions of commodity investment (commodity index tracking) funds.

Most of statistical testing was performed on the Legacy reports, and clearly these datasets are the most widely followed and respected among market professionals. We suggest to concentrate on these reports, and look to include the Disaggregated data analysis after its history builds up to at least five years.

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Our subscribers can access our research and advanced charts on all kinds of COT reports, including Legacy, Disaggregated, Traders in Financial Futures and CIT report.

Two types of COT reports are issued by the CFTC, the Futures Only and the Futures and Options reports, both in Long and Short formats:

1 Futures Only

Gathers traders’ positions from all U.S. futures markets

2 Futures and Options

Includes traders’ U.S. options positions as well (options positions are converted to futures contract equivalent positions by delta correction).

Short Format

Lists traders’ positions, practically everything that is needed for trading purposes

Long Format

Shows all kinds of statistics and concentration ratios, that have little or no use, especially for trading purposes. We advise to use the Short format, the extra information in the Long format is practically useless.

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Our subscribers can research both Futures and Futures and Options data on all kinds of reports (Legacy, Disaggregated, Traders in Financial Futures, COT). We found that sometimes useful signals present themselves in only one of the datasets. We encourage you to monitor the developments in both datasets in order to gain the best possible grip on the markets.

Reports are published each Friday (except if it’s a holiday) at 3:30 pm Eastern time and contain all long and short positions held by the certain trader groups on the immediately preceding Tuesday, after close.

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Our subscribers can access the analysis and advanced charts of recent COT reports in 12 hours after the (usually Friday evening) publication. We also include Volume and Open Interest analysis for no extra charge.

The basis of COT analysis is finding seizable imbalances in trader positioning (’commitedness’). COT reports show traders positions: how many long and how many short contracts did Commercials, Large and Small Speculators hold after the close of the previous Tuesday’s trading (or on another day, if Tuesday was a holiday).

If a trader group holds the same amount of short and long contracts, we cannot ’speculate’ on where that group, in aggregate, sees the market going. Fortunately, this is a rare case – most of the time longs and shorts of a trader group (eg. Commercials) differ, often in a large degree, that allows us to see in which direction that given group is positioning itself. If, for example, Commercials on the Wheat market are net long (ie. they hold more longs than shorts), we may speculate that the ’insiders’ of the Wheat market are betting on price rise (or hedging against it, that is essentially the same in terms of buying pressure).

The essence of COT analysis is to subtract the shorts from the longs and arrive to the net commitment of each trader category. An equal amount of longs and shorts balance themselves out, that gives no useful information about where those traders, in aggregate, view the markets to go in the future. If, however, they hold more long contracts than short contracts, it is clear that they are bullish. Of course, if they hold more shorts than longs, they are bearish.

Here is an example on how to calculate net positions: by subtracting total shorts from total longs, we get the net commitments of each category, that will be the basis of our further analysis. Most references to COT data (for example: ’large speculators in gold reached a new extreme’) are referring to these net COT positions. The net values are not published by CFTC, but can be easily calculated, as follows (data is from the 5/18/2010 report):

NET COMMERCIAL POSITION = Commercial long - Commercial short = 294,047 - 223,852 = +70,195

NET LARGE SPECULATORS POSITION = Non-commercial long - Non-commercial short = - 48,27

NET SMALL SPECULATORS POSITION = Non-reportable long - Non-reportable short = - 22,168