THE COMMITMENT OF TRADERS (COT) REPORT Open Interest. Open interest is the total of all futures and/or option contracts entered into and not yet offset by a transaction, by delivery, by exercise, etc.
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Each currency pair has different characteristics, especially the high-yielding ones, which rarely see flips since most positioning tends to be net long for extended periods as speculators take interest-earning positions. In this example, the left axis of the chart is reversed compared to Figure 2 because the GBP is the base currency. The reason why these extreme positions are applicable is that they are points at which there are so many speculators weighted in one direction that there is no one left to buy or sell.
As a result, exhaustion ensues and prices begin reversing. Open interest is a secondary trading tool that can be used to understand the price behavior of a particular market. The data is most useful for position traders and investors as they try to capitalize on a longer-term trend. Open interest can basically be used to gauge the overall health of a specific futures market; that is, rising and falling open interest levels help to measure the strength or weakness of a particular price trend.
For example, if a market has been in a long-lasting uptrend or downtrend with increasing levels of open interest, a leveling off or decrease in open interest can be a red flag, signaling that the trend may be nearing its end.
Rising open interest generally indicates that the strength of the trend is increasing because new money or aggressive buyers are entering into the market.
Declining open interest indicates that money is leaving the market and that the recent trend is running out of momentum. Trends accompanied by declining open interest and volume become suspect. Rising prices and falling open interest signals the recent trend may be nearing its end as fewer traders are participating in the rally.
Notice that market trends tend to be confirmed when total open interest is on the rise. In early May , we see that price action starts moving higher, and overall open interest is also on the rise. One of the drawbacks of the FX spot market is the lack of volume data.
To compensate for this, many traders have turned to the futures market to gauge positioning. Based on empirical analysis, there are three different ways that futures positioning can be used to forecast price trends in the foreign-exchange spot market: It is important to keep in mind, however, that techniques using these premises work better for some currencies than for others.
Here is a quick list of some of the items appearing in the report and what they mean: There are three primary premises on which to base trading with the COT data: Changes in open interest can be used to determine strength of trend. Flips in Market Positioning Before looking at the chart shown in Figure 2, we should mention that in the futures market all foreign currency exchange futures use the U.
Also in the graph below I have isolated only the commercial movement and the Movement of Crude Oil over the last few years. It is very easy to see that the commercial movement dominates the overall price trend of oil. So in order to further make use of this data in a way that can help us speculate on futures prices one common indicator that I want to show you how to construct is called the COT index.
Its now reflects where the current net positions rank as a percentage of its range over the recent past data typically three years. I use this to watch for extremes reading in the commodities markets.
This is not necessary a call to action but rather an illuminating clue for possible trading setups. The graph above is a great example of how the COT index shows when the cocoa market was overbought or oversold during the past couple years.
There are many other indicators that I have come across being applied to the COT Report data, some include:. Be aware by the time you get this data it is at least a week old and large speculators and commercials can and do change positions quickly!
This can skew the data slightly in particular markets where calendar spreads are a large portion of the overall open interest. Lastly I want to leave you with some graphs of current commodities markets on their current COT and Index Positions that I believe are at important inflection points.
This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions. Any actions taken based on the views expressed in this blog are solely the responsibility of the user.
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About Commitments of Traders. The Commitments of Traders (COT) is a report issued by the Commodity Futures Trading Commission (CFTC). It aggregates the holdings of participants in the U.S. futures markets (primarily based in Chicago and New York), where commodities, metals, and currencies are bought and sold. Analyze the COT reports with us! Futures only AND Futures and Options data and charts on the old and NEW (Disaggregated, Traders in Financial Futures, CIT) Commitments of Traders reports are available. Commitments of Traders (COT) Reports Descriptions. Introduction and Classification Methodology. The Commodity Futures Trading Commission (Commission or CFTC) publishes the Commitments of Traders (COT) reports to help the public understand market dynamics.