How to Use the COT Report for Trading

How to Understand the COT Report

Anyone who wants to be involved in the currency market needs to understand how to find certain sources of information that they wouldn’t necessarily be all that concerned about in other situations.

However, at the end of the day, we all need to make sure we are well-informed and understand what is happening in the various assets that we are attempting to trade.

The Commitment of Traders (COT) report (the COT report) is a great resource to look at because it will give an indication of where the following groups of traders are positioned in any given market:

• Commercial players (hedgers)

• Non-commercial players (large speculators)

• Retail players (small speculators)

It is best to know where all of these groups stand on the trade because you need to know which actions you should take to either get in line with where they are or take a position that is opposite theirs.

Pay Close Attention to the Commercial Traders in the COT Report

You should pay particular attention to the commercial traders who are involved in the market. They are the people who are most likely to have the inside scoop as far as what to trade and why.

They are not merely speculating or going off of extremely limited information. Instead, they know what it takes to manage their trades, and they likely have the inside scoop on where the market may be headed next.

Besides that, they are putting the largest amounts of money to work in the market, so you can be sure that they are not willing to take a chance on a wild hunch. These traders tend to be most bullish at market bottoms, and most bearish at market tops.

If you pay attention to how they are trading the market, you might be able to key in on the kind of changes that they have made to their positions to make them more in line with where the market is actually headed. You may decide to get yourself in line with their position as well.

Large Speculators

These are traders who have no interest in actually holding the asset that they are purchasing or selling. Instead, they are simply trying to ride the market for all that it is worth. Thus, you will want to monitor their trading activity as well to see where they place their bets. They can also be reasonably good indicators of where the market is truly headed.

Small Speculators

These accounts are typically on the wrong side of the trade. They are everyday people, and they simply don’t have the slightest clue as to where the market is likely headed. Thus, the actions that they take can be thought of as anti-trend. That is to say that you can ignore the moves that they make or even trade opposite of them because they are probably on the wrong side of the trade anyway.

How to Use the COT Report for Trading

What do you need to do in order to place the best trades based on the data that you have available? Well, you can use the Commitment of Traders (COT) report to help make more informed decisions about where you will place your bets. It is a solid piece of information that you have available to you, and you should take full advantage of it.

Long-Term Trades

The COT report only comes out once per week, so it is best used by traders who intend to make long[1]term trades — like swing traders. This doesn’t mean that you completely ignore it if you trade on shorter timeframes, but it will be most useful to you when you trade with a long-term mindset.

Extreme Positions

What you are looking for with the COT report are extremely net long and extremely net short positions. You want to try to find traders who are way out on a limb one way or the other when it comes to their positioning in a trade.

It is a lot easier to spot these types of trends when you are looking at a COT report and can see how people have positioned themselves within the market. Take advantage of the way that other traders are lining up their trades, and make sure you know how others are set up in the market so you can get on the right side with them.

However, when there are too many traders who are net long or net short, they may hit a barrier on the price, and a reversal may occur. Always keep this in mind when working out how you will position your own trades to take advantage of big swings like this.

Picking Tops and Bottoms with the COT Report

It isn’t surprising to most to learn that the best time to get long or short in the market is in the moments when the market sentiment is most extreme in one direction or the other.

When there are people who are pushing too strongly in one direction or another, it might be a good idea to get on the opposite side of where everyone else is. Hedgers are the people who tend to buy at the market bottom, but speculators are known to sell at exactly that moment.

Speculators get nervous and bail out at exactly that moment. Thus, it is best to follow the behaviour of hedgers instead of speculators.

Using the commitment of traders (COT) report can help you do just that. When hedgers are adding to their positions as speculators are selling, you may have found the market bottom. You should give extra consideration to adding to your position at this given time.

Speculators are typically the ones who make the wrong trades because they are not equipped with all of the details and information that make the best trades possible. What you should know is that you are most likely going to make the most money on your trades when you get involved at the moment that the market sentiment is at its most extreme (in either direction).

You should check on the market sentiment at any given time to make sure you know what the various traders are thinking about the conditions of the market at any given time. Check regularly to make sure you know where things stand at any time.

Check out the following example on the AUSUSD chart. On this chart, you can see the COT net positions of dollar speculators at the bottom:

• Commercial traders (green)

• Large speculators (red)

• Small speculators (blue)

By tracking what the large speculators are doing, traders can find precursors to reversals in the market.

Be Prepared to Hold the Line

The COT can give you an indication of where traders are positioned at the moment, but this doesn’t mean that there won’t be bobbles and fluctuations in the market along the way. In fact, you should be prepared to deal with a lot of the bouncing around that occurs in the market all the time. You need to be steadfast in your position and make sure you don’t give in to the temporary movements that are bound to occur.

Use the COT report as your guiding light to stay the course no matter how bumpy the road ahead is. You need to have conviction in your trades, and that means noticing what the COT report says and how you can use it to your own advantage.