Trading Market Sentiment - COT Report

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Introduction


A trader must realize that the overall market is a combination of all views, ideas and opinions of all the participants in the market - EVERYONE!   This combined feeling that market participants have is called market sentiment.

Individual traders must gauge sentiment if they are to succeed. They need to know whether 'The Market' is bullish or bearish and when support and resistance will kick in. There's a lot of psychology involved. It's maybe a good idea to look over Module 6. Trading Psychology again.  In The Stock Market, sentiment can be measured by Volume indicators.  In Forex trading volume isn't easily measured, so market sentiment must be measured by another means.  A sentiment trading approach (a sensible one) relies on a concept called Open Interest which can be acquired from a Commitment of Traders Report. The COT Report measures Open Interest within Futures markets, which can then be transfer to the spot markets.

Open Interest: The total number of outstanding contracts that are held by market participants at the end of each day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both. More can be learned in Volume and Open Interest - Module 3

I'd like to emphasize the lagged nature of the report. It updates us on positions of the past week, it is a lot more valuable as a long-term 'volume' indicator, with periods of weeks, rather than days being the field of its measurements. However, The CME group also publish Daily open interest reports for Forex futures. We'll look at this in our next lesson - Trading COT as a Volume Indicator

Getting the Commitment of Traders Report (COT)

This report is published ever Friday afternoon in Chicago (Friday evening in Europe and Africa, around midnight in The Middle East and Early Saturday Morning in Asia and Australasia) just prior to The FX market Close. The COT measures the net long and short positions taken by FX Futures traders, so it's a great resource to gauge how heavily these market players are positioned in the market.

The COT is published by The Commodities Future Trading Commission (CFTC). This COT report is actually a FX futures market report, but it allows us to gauge sentiment in the spot FX markets too. Because Spot FX markets are over the counter markets it's hard to measure volume because there's no centralised market. 

How do traders get the report?  Simple:


Understanding The COT

After opening the report, scroll down past the commodities and you'll find the major currencies - Yen, Euro, GBP etc...  The below fig. shows The COT report after scrolling down to The EURO.

Screenshot of COT Report

Let's explain some of the terms and look into some of the players who report to The CFTC.
  • Commercial - These are the large companies that use currency futures to protect themselves from exchange rate fluctuations.  Companies who trade internationally (like agricultural companies) will use these hedge funds to minimise their risk. 
Eg. Boeing has 25% of it's components manufactured in The UK. These UK companies demand payment in GBP on delivery in 6 months. The USD may depreciate against GBP in 6 month meaning these components will increase in price, which is bad for Boeing. To protect against this currency fluctuation Boeing uses a hedge fund to buy GBP on signing the original contract, so if USD does depreciate against GBP in those 6 months they are protected against the contract loss (i.e. they have a position in GBP, which increases, therefore making money from the futures contract).
  • Non-Commercial - Traders who are trading for speculation purposes - banks, institutions and retail traders. They simply want to make money.  The larger institutions are usually trend and moving average following and they have the power to move the markets dramatically
  • Long - Long contracts reported
  • Short - Short contracts reported
  • Open Interest - The number of futures contracts that have not been delivered.  For every buyer there must be a seller. In our above example the total reported long positions are 254,358 and the total  'non-reportable'  long positions are 28,432, totalling 282,790 of open interest.  This is exactly the same for total short positions. We discuss how to utilise Open Interest in our next lesson as a pseudo volume indicator.
  • Number of traders - This is the total number of traders who are required to report positions to the CFTC.
  • Reportable positions - the number of futures positions that are required to be reported according to CFTC regulations.
  • Non-reportable positions - open interest positions of traders that do not meet the reportable requirements of the CFTC like retail traders.  These positions are still reported by CFTC.
How do you get this report into a chart indicator?  Well, you can get The Report in indicator form at www.timingcharts.com/charts.  For more historical data you can download excel files from https://www.cftc.gov/marketreports/commitmentsoftraders/CFTC009781.  As we'll explain in our next lesson, you can also go to The CME web site to download end of day (E.O.D) data.

More...

Next we'll look at this and go on to look at how to use The COT report in a trading Environment in Trading The COT
Just to note that the Futures market quote a little differently from The Spot Market.  The USD is always the quote (counter) currency in the futures market, i.e it comes second.  This is fine if the USD is also the same in the spot market, like GBP/USD or EUR/USD.  However, USD/JPY or USD/CAD etc... would be reversed in the futures and forwards markets.  For more on this read What's Forex Trading and How to Read Quotes.  Also make sure you're looking at the correct market, as the COT report will detail currency indexes as well as pairings.


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Introduction


A trader must realize that the overall market is a combination of all views, ideas and opinions of all the participants in the market - EVERYONE!   This combined feeling that market participants have is called market sentiment.

Individual traders must gauge sentiment if they are to succeed. They need to know whether 'The Market' is bullish or bearish and when support and resistance will kick in. There's a lot of psychology involved. It's maybe a good idea to look over Module 6. Trading Psychology again.  In The Stock Market, sentiment can be measured by Volume indicators.  In Forex trading volume isn't easily measured, so market sentiment must be measured by another means.  A sentiment trading approach (a sensible one) relies on a concept called Open Interest which can be acquired from a Commitment of Traders Report. The COT Report measures Open Interest within Futures markets, which can then be transfer to the spot markets.

Open Interest: The total number of outstanding contracts that are held by market participants at the end of each day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both. More can be learned in Volume and Open Interest - Module 3

I'd like to emphasize the lagged nature of the report. It updates us on positions of the past week, it is a lot more valuable as a long-term 'volume' indicator, with periods of weeks, rather than days being the field of its measurements. However, The CME group also publish Daily open interest reports for Forex futures. We'll look at this in our next lesson - Trading COT as a Volume Indicator

Getting the Commitment of Traders Report (COT)

This report is published ever Friday afternoon in Chicago (Friday evening in Europe and Africa, around midnight in The Middle East and Early Saturday Morning in Asia and Australasia) just prior to The FX market Close. The COT measures the net long and short positions taken by FX Futures traders, so it's a great resource to gauge how heavily these market players are positioned in the market.

The COT is published by The Commodities Future Trading Commission (CFTC). This COT report is actually a FX futures market report, but it allows us to gauge sentiment in the spot FX markets too. Because Spot FX markets are over the counter markets it's hard to measure volume because there's no centralised market. 

How do traders get the report?  Simple:


Understanding The COT

After opening the report, scroll down past the commodities and you'll find the major currencies - Yen, Euro, GBP etc...  The below fig. shows The COT report after scrolling down to The EURO.

Screenshot of COT Report

Let's explain some of the terms and look into some of the players who report to The CFTC.
  • Commercial - These are the large companies that use currency futures to protect themselves from exchange rate fluctuations.  Companies who trade internationally (like agricultural companies) will use these hedge funds to minimise their risk. 
Eg. Boeing has 25% of it's components manufactured in The UK. These UK companies demand payment in GBP on delivery in 6 months. The USD may depreciate against GBP in 6 month meaning these components will increase in price, which is bad for Boeing. To protect against this currency fluctuation Boeing uses a hedge fund to buy GBP on signing the original contract, so if USD does depreciate against GBP in those 6 months they are protected against the contract loss (i.e. they have a position in GBP, which increases, therefore making money from the futures contract).
  • Non-Commercial - Traders who are trading for speculation purposes - banks, institutions and retail traders. They simply want to make money.  The larger institutions are usually trend and moving average following and they have the power to move the markets dramatically
  • Long - Long contracts reported
  • Short - Short contracts reported
  • Open Interest - The number of futures contracts that have not been delivered.  For every buyer there must be a seller. In our above example the total reported long positions are 254,358 and the total  'non-reportable'  long positions are 28,432, totalling 282,790 of open interest.  This is exactly the same for total short positions. We discuss how to utilise Open Interest in our next lesson as a pseudo volume indicator.
  • Number of traders - This is the total number of traders who are required to report positions to the CFTC.
  • Reportable positions - the number of futures positions that are required to be reported according to CFTC regulations.
  • Non-reportable positions - open interest positions of traders that do not meet the reportable requirements of the CFTC like retail traders.  These positions are still reported by CFTC.
How do you get this report into a chart indicator?  Well, you can get The Report in indicator form at www.timingcharts.com/charts.  For more historical data you can download excel files from http://www.cftc.gov/marketreports/commitmentsoftraders/CFTC009781.  As we'll explain in our next lesson, you can also go to The CME web site to download end of day (E.O.D) data.

More...

Next we'll look at this and go on to look at how to use The COT report in a trading Environment in Trading The COT
Just to note that the Futures market quote a little differently from The Spot Market.  The USD is always the quote (counter) currency in the futures market, i.e it comes second.  This is fine if the USD is also the same in the spot market, like GBP/USD or EUR/USD.  However, USD/JPY or USD/CAD etc... would be reversed in the futures and forwards markets.  For more on this read What's Forex Trading and How to Read Quotes.  Also make sure you're looking at the correct market, as the COT report will detail currency indexes as well as pairings.


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