COT Reports, Part 1

Hi everyone,

Hope you’ve enjoyed my last three articles about market sentiment and now here is the last part of these article series and it’s got two parts itself.

There are Three Cot Report Articles:

 

What is a COT Report?
This is a short history of US.  Commodity Futures Trading Commission (also known as CFTC):
“October 23-24, 1974—Congress passes the Commodity Futures Trading Commission Act of 1974 and it is signed by President Gerald Ford. The bill overhauls the Commodity Exchange Act and creates the Commodity Futures Trading Commission (CFTC or Commission), an independent agency with powers greater than those of its predecessor agency, the Commodity Exchange Authority. For example, while the Commodity Exchange Authority only regulated agricultural commodities enumerated in the Commodity Exchange Act, the 1974 act granted the CFTC exclusive jurisdiction over futures trading in all commodities.

This is an example of the CFTC reports that is provided here:

Example of the COT Report

COT Report Example

As I want to write a complete article about this subject so I’ve copied below sentences directly from www.cftc.gov as an explanatory note on these reports:

“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. The aggregate of all long open interest is equal to the aggregate of all short open interest.

“Commercial and Non-commercial Traders:

When an individual reportable trader is identified to the Commission, the trader is classified either as “commercial” or “non-commercial.” All of a trader’s reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in CFTC Regulation 1.3(z), 17 CFR 1.3(z). A trading entity generally gets classified as a “commercial” trader by filing a statement with the Commission, on CFTC Form 40: Statement of Reporting Trader, that it is commercially “…engaged in business activities hedged by the use of the futures or option markets.” To ensure that traders are classified with accuracy and consistency, Commission staff may exercise judgment in re-classifying a trader if it has additional information about the trader’s use of the markets. A trader may be classified as a commercial trader in some commodities and as a non-commercial trader in other commodities. A single trading entity cannot be classified as both a commercial and non-commercial trader in the same commodity. Nonetheless, a multi-functional organization that has more than one trading entity may have each trading entity classified separately in a commodity. For example, a financial organization trading in financial futures may have a banking entity whose positions are classified as commercial and have a separate money-management entity whose positions are classified as non-commercial.

Market Extremes:
There is a word here that we have to study it precisely, “Market Extreme”
We have discussed about how sentiment and emotion works in the financial speculations before, but there is a concern here and it’s about how this sentiment can be changed? Absolutely you know that Forex trends won’t continue forever, so sentiment of the participants must change not to see a trending market forever.
When there is an extreme sentiment among market movers it’s likely to see a turnover. Assume that you are driving a Lamborghini  in a non-ending direct highway without any other cars bothering you, 0Km/h, 80Km/h, 150Km/h and 300Km/h, now you are exactly in an extreme situation; you know that you can accelerate more but you are likely to slow down the car.
It’s the same in the financial market, when the crowd are in an extreme condition, our sentiment will force us to go against the crowd.
Going against the crowd? This is exactly the most common problem of amateur traders; they like to catch market tops and bottoms, when market goes bullish for example for a week then these traders say:  “it can’t be possible!”

This is not what I want to teach you, we are going to find a way to examine sentiment of a specific group of people and see if there is an extreme situation.
With a simple mathematical process in the Commercials and Non-Commercials numbers in the picture above we can find that strange thing in the market very easily.

I have to note that this is not a holy grail; I’m not going to teach you a mysterious method but for sure the way that you are thinking about the market is going to be changed.

Have a great Saturday pm

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