COT Reports, Part 2

This is Mani’s 5th article about market sentiment. You can view his previous articles here: 1|2|3|4
You can follow Mani on twitter.

Hello traders, wish you had a great weekend and have an awesome week ahead.

I’m going to show you again that example of the COT report in the previous part:

COT Report
COT Report

These reports are collected every Tuesdays and will be published every Fridays and in some categories, see the picture, this example is for contracts of 125,000EUR.
All of these contracts are against the US. dollar, so the example above shows future contracts for EURUSD.

You can see in the report above, Noncommercials (like hedge funds and institutional traders)  are 70,185 long contracts and 31,575 short contracts so they are net 38,610 long contracts.
Commercials (big companies that are affected by fluctuations in the Japanese yen) are 74,771 long contracts and 125,394 short contracts and so they are 50,623 short contracts.

Here there is an important point, very important one! On the surface you can see Noncommercials and Commercials seem to be at odds with one another but I have to mention that Noncommercials are also called speculators and these kind of traders are living by trading. In the other hand we have got commercials, these traders are big companies that want to protect their interests against potentially damaging fluctuations in the Japanese yen.
For example assume a company that exports some kind of material from Japan to USA, a weak Japanese yen here is a piece of gold for this exporter and if he wants to protect himself against the strengthening of the yen, this company might open a long position in yen futures, so any business losses due to a strong yen will be offset  by a gain in his position.
So as a conclusion, we are going to chase Noncommercial contracts to reach the sentiment of the market.

Big Speculators Vs. Small Speculators:
For now we all know that Noncommercials are speculators and also they are big ones, you know why? Because they are trading just in “reportable contracts”. In the example above we have got contracts of 125000 EUR, it’s big isn’t it?
But if you see carefully in the picture you can see right at the end: “Nonreportable Positions”
These are small speculators, their contracts is smaller than 125000 EUR and so their positions are Nonreportable!
They are 58,837 long contracts and 46,824 short contracts so they are net 12,013 long contracts.

Which of these groups are most likely to be correct?
I’m going to show you two approaches of using these numbers, one is to find the answer of the question above and the other is to find market extremes as I mentioned in the previous part. So follow the entire article and we have got great resource for your trading journey.

  • First Approach:

Look at this chart:

Net Positions of Future Traders
Net Positions of Future Traders

This chart shows us net positions of those three groups of traders (Commercials, Big Speculators, Small Speculators) from early 2010 till 2nd November for EUR contracts.
Note: Negative numbers show they are net short and positive numbers indicate they are net long.
As this report is published in a weekly schedule, so here we are going to compare this chart with weekly chart of EURUSD:

EURUSD Weekly Chart
EURUSD Weekly Chart

From early 2010 till 21st September, commercials were net long, big speculators were net short and small speculators were net short generally. Now look at the weekly chart of EURUSD, from early 2010 till early June we had a strong bearish trend confirming that commercials were absolutely in counter-trend contracts and Big/Small Speculators were correct!
So from now on we are going to disregard commercials and only study Big/Small speculator numbers.
From 21th of September we can see Speculators went net long and still they are long.

We are going to have a conclusion here and in the next part we’ll discuss about the second approach and I’m sorry that I said COT reports will be in two parts.

Conclusion on the first approach:

  1. By analyzing how many contracts speculators they have and calculate net number of their contract we can find out the general sentiment that rules the market and the overall trend.
  2. When this number crosses zero then there will be a confirmation of a turnover in the trend.
  3. With a comparison between net commercials and net speculators we can find market extremes and we can easily find market tops and bottoms as sentiment is likely to be changed around these situations.

In the next part I will discuss about how exactly we can find market extremes.


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