Futures traders can be broken down into three main groups of traders based on their goals, objectives, and the size of their trading positions:
- Commercial traders
- Large professional speculators
- Everyone else which includes self-directed retail traders
The “everyone else” on that list, including many self-directed retail traders, keep track of the positions these large traders control using the Commitment of Traders (COT) Report. Self-directed traders often find it beneficial to keep tabs on commercial traders and professional speculators as these large traders often have market insights and research that is not always available to smaller traders. By tracking their positions, retail traders can often gain insight into the “smart money” directional sentiment.
What is the Commitment of Traders Report?:
The Commodity Futures Trading Commission (CFTC) releases the COT report weekly. The CFTC is the governmental regulatory body that protects the public from fraud, manipulation, and abusive practices related to the trading of commodity and financial futures and options. It promotes open, competitive, and financially robust futures and options markets. The CFTC requires all large traders to report their open futures positions on a weekly basis.
The report is designed to help traders better understand the dynamics of market sentiment and the position of each futures market related to the three groups of traders mentioned above.
For a more in-depth look and analysis of the Commitment of Traders report, be sure to watch the on-demand video with renowned author and trader Larry Williams: Understanding the Commitment of Traders Report in Gold.
Large Commercial Traders in the Commitment of Traders Report
Large commercial traders are typically trading futures to hedge the price of an underlying commodity or financial instruments that are key to their business.
For example, silver mining companies who sell futures are hedging known silver reserves that are yet to be mined. Commercial silver traders are also big industrial companies that use large amounts of silver in the manufacturing process of jewelry, medicine, and electronics, and will purchase silver futures contracts to lock in prices to better control costs.
Another example of a commercial futures trader might be a large pension fund or mutual fund that will sell major market index futures to hedge a large stock portfolio when stocks are expected to decline.
Large Professional Speculators in the Commitment of Traders Report
Large professional speculators are typically large active futures traders like commodity pool operators, proprietary trading firms, institutional investors, and hedge funds. These traders are purely speculating on the price movement of a futures market and generally do not take delivery of or hold the actual underlying instrument or commodity.
Much like commercial traders, large professional speculators will trade and hold both long and short positions, based on their market outlook. Together, they normally account for 80% or more of the daily trading volume and open interest in most futures markets.
Self-directed Retail Traders in the Commitment of Traders Report
Self-directed retail traders make up the remaining non-reporting daily trading positions in all futures markets. Like large speculators, they trade price movement both long and short, and almost never take actual delivery of the underlying commodity they are trading.
Advantages of the Commitment of Traders Report
The Commitment of Traders report, used in conjunction with other types of market and technical analysis, can be an indispensable tool in a futures trader’s arsenal, offering deep insights into market trends and positions held by different types of traders. By analyzing the COT report historically within a chart, traders can gain a clear understanding of market dynamics and sentiment, which can be invaluable in making better more informed trading decisions.
Access Position and Trading Information
One of the real advantages of the COT report is the transparency provided on the open interest and net position of the largest traders for each market. This clarity along with order transparency on the futures exchanges puts all traders, regardless of size, on a fair and level playing field, where all traders can see the same information at the same time.
Track Open Interest to Interpret Directional Sentiment
Open interest is the total number of outstanding contracts that are held by market participants at the end of each trading day. Open interest in futures and futures options is also included in the COT report, which also includes option contracts. Increasing or decreasing open interest can often suggest changes in the current trend direction.
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