Understanding the COT (Commitment of Traders) Report

A COT Report analyses a particular future by dividing open interest into three: the commercials or insiders, big traders and small traders. The CFTC (i.e., they are parallel to the SEC) mandates that insiders and big traders over a minimum amount of trading per week, must report the sum of their longs and shorts. The small trader data is derived from what is left over after subtracting the first two groups. Here is an example of a COT Report Analysis for Soybean Oil:

The top rectangle contains the raw data from the COT data. Shorts are subtracted from longs to create net-longs. The rectangle second from the bottom is the raw data put into an index where the high is the highest this future has been in the last three years and the low (i.e., maximum short) is the lowest it has been in three years. The bottom data is the acceleration or deceleration that the commercials or insiders have had during the last six weeks. In the COT Report Analysis above, the commercials are more short then they have been during the last three years. They have increased their shorting to almost -30%. If this had been below -40%, then this would represent an ideal shorting pattern.

The chart price data at the top of this COT report analysis is weekly data; every bar represents a week of trading. The black line in the top rectangle of this COT report analysis is open interest. This is the total number of contracts that are in existence at a particular time. In the chart above, open interest has been increasing along with the big and small traders. The commercials are shorting. The commercials are almost always right while the traders, being trend followers, are wrong when the trend changes. They tend to buy at highs and sell at lows.

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