Analysis of reports of COT
Of course, any experienced trader will tell you that trading is desirable in the same direction as large players. If you try to come in against them, it will be akin to trying to stop the locomotive in full motion - you will simply be taken out of the market. The COT reports provide, albeit with some delay, an opportunity to understand the direction of the major players.
Understand how big players are going to act the dream of any timeframes. But, if you 're not a hedge fund or a qualified investor, it 's impossible to see what price levels the clusters of deferred warrants are at, and how much they "cost." But not everything is so sad - it is possible to predict the future movement of the market using the reports of COT (Commitments of Traders).
The reports are published weekly by the Commodity Futures Timing Trading Commission, an independent U.S. federal agency for the control of stock exchange activities. All legal entities and natural persons weekly trading system on the stock exchange are obliged to provide information on concluded transactions if they exceed a certain volume. For example, the analysis of the COT foreign exchange futures reports takes into account the volume of at least 400 contracts during the trading day.
The COT is published every Friday, at 3:30 pm North American time. There are three reports:
usual (Legacy Report);
Traders in Financial Futures Report;
Supply Commodity Index (CIT)
Detailed DCOT (Disaggerated Report).
All data are presented at the close of Tuesday of the week, i.e. with a three-day delay. Analysis of COT reports for myforex market is primarily done according to the regular (Legacy) reports.
Basic data of HONEYCOMBS
Since reports for the European region come in the evening, they can only be used the next Monday after the opening of the new session. Therefore, you can conduct a detailed analysis of the current situation on the weekend.
The COT shows the evolution of open interest (OE) - the total number of contracts opened and outstanding by the delivery or counter-division at the time of reporting. OI increases by 1 when opening a new option or futures contract, and decreases accordingly when closing.
Forex traders should first pay attention to the following CFTC data:
NON REPORTABLE POSITIONS - data on positions of small traders, which do not have a significant impact on price movement. Can be used as a confirmation indicator for a new trend.
NON-COMMERCIAL - Open interest of big players: banks, hedge funds, investment funds and private investors. Analysis of the COT reports on the dynamics of changes in the number of long and short positions gives a fairly reliable forecast of where the market will move in the next few weeks.
SPREADS - Opposite items for purchase and sale opened by one major player. The information is used as an indicator in strategies using futures or options with different export dates, as well as in inter-bank arbitration. For the Forex market, not a very important indicator, but if it increases, it may indicate the beginning of lateral movement.
COMMERCIAL - The analysis of COT reports takes into account in this category transactions opened by hedgers and commercial enterprises to ensure current activities or to carry out export/import transactions. In other words, they do not seek speculative profits, but act in their own interests
Special CFTC permission is required to qualify from the Commercial category. In the last 2-3 years, swap dealers and large banks have also received similar licenses.
TOTAL is the total number of contracts separately bought/sold by major players, hedgers and commercial businesses.
CHANGES FROM - change in the number of contracts from the last COT report
Additional report parameters can be used as an additional indicator for the forecast:
Percent of Open Interest for Each Category of Trader is the percentage of open interest for each group of participants. If the analysis of the COT reports shows an increase in interest, this may suggest the beginning of an uptrend.
Number of traders in each category is the number of members per group. When the number of large players decreases, it indicates a significant drop in the quotation in the near future.
All COT reports are available in two variants: Futures Only and combined, taking into account the general open interest on futures and options, taking into account delta-adjusted options.
Отчёт Traders in Financial Futures Report (TTF)
TTF data allows a more detailed analysis of the interests of large players, which can be useful for weekly trading system stocks, indices and commodity futures:
Dealer/Intermediate - this group of marketers classifies the analysis of COT reports as "Sell Side." Their main activity is to execute purchase requisitions of other participants for a certain commission or spread. These are usually large investment funds, commercial banks and dealers that implement structured instruments that maximize risk diversification. They see almost all market positions, including deferred ones, so they can produce the most effective inter-market analysis. Changing their open interest is the strongest signal of future trends.
The following three categories of analysis of the COT reports are "Buy Side" and they are clients of the first group:
Asset Manager/Institutional - institutional investors and managers: pension funds, insurance companies, mutual investment funds (mutual funds) and other private holders of external assets. The main task is to preserve funds, with moderate profits.
Leveraged Funds - Analysis of SOT reports on Genge Funds, licensed trade consultants on exchange products (CTA) and trade pool operators (CPO), which support export/import operations of organizations and do not have direct access to the exchange. In the same category, the CFTC refers to speculative traders and prop branches of investment banks focused on maximum profits from trade, arbitration and swap transactions.
Other Reportables - The analysis of the COT reports refers to this category of organizations using the exchange as a means of hedging banking, trading and production business risks: central banks and treasury, credit and mortgage organizations.
The classification of the organization may change when the next COT report is issued for a number of reasons: a new s forex trading strategy affecting related market segments, expansion of the set of trading instruments, additional information changing, in the opinion of the Commission, the rating and status of the exchange player, other factors.
In addition, the total number of participants for each CFTC category is usually greater than the reporting organizations. This is because the same player can simultaneously have both short and long positions, work with swaps, or provide hedging of commodity deals. This factor should be taken into account by analysis, especially the dynamics of speculative positions.
Using CFTC Data in Trade Practices
Before considering examples of the use of COT reports as an indicator of future price movements, it is necessary to take into account that futures contracts are opened in US dollars, so the movement of reverse quotations (EUR/USD, GBP/USD, etc.) will coincide with the corresponding currency futures. In turn, direct quotations (USD/JPY, USD/CAD, etc.) will be "mirrored" by exchange contracts.
We remind you that the reports are issued on Fridays and accumulate data for the past week, so given the delays, adequate analysis of the COT reports is possible only on weekly and monthly timeframes.
A few words about hedgers: it is believed that their actions can be used as a leading indicator of the change in the current trend - if the volume of the Commercial position grows while the price falls, a new upward movement should be expected and vice versa. But in fact, this is the wrong analysis of the SOT reports, as most companies from the real sector stand opposite to the current futures trend.
Such an illogical situation at first glance is due to the very meaning of the hedging transaction. Let us imagine that the economic entity has made a deal to acquire a real currency, which will then be used in the real sector of the economy to invest or secure current activities. Now its task is to minimize possible losses from exchange rate change by concluding the opposite transaction. Speaking in the language of trading, a "castle" is created from two opposite positions allowing to compensate for current losses without speculative profit.
So the analysis of current and future market sentiment is done only by the dynamics of the volume of large and small players. Many services working with CFTC information generally disable the output of hedger positions as minor data.
Another important point that often confuses newcomers just beginning to work with COT data is that if you look only at digital data, the aggregate position will always be "trend-neutral." A natural question arises as to how the net position by category increases or decreases when there is a seller for each buyer and in that case the total balance should be zero?
In fact, the analysis of the COT reports does not contain any contradiction - indeed, if the futures are bought, it should be sold by someone for the appropriate amount. But in the market, apart from small speculators and hedge funds, the purpose of which is profit is the institutional investors and hedgers mentioned above, who can be counterparties of these two categories of players holding futures and options outside active trade until the moment of export. This factor creates a change in CFTC data over time, but is rarely mentioned in analytical publications.
The analysis of weekly ballots is used in two main directions: as confirmation of the current market trend and as an indicator of the state of overbought/resale of the asset.
Analysis of COT reports to confirm the current trend
In this case, it is necessary to match the change in the amount of positions (except hedgers) with the current quotations of the currency or commodity futures. For example, if the technical indicator data indicates a continuation of the uptrend and at the same time large players increase "long" volumes - you can open or increase items for purchase.
In the opposite situation, when quotations even grow steadily when the volume of long positions on COT decreases, it is possible to assume with high probability that in the near future there will be so-called "distribution" - smart money begins to leave the asset and correction will begin. Most often this results in divergence as an indicator of close reversal.
Most often, "handout" begins after the price reaches new historical highs/lows, when speculative positions taken into account by the CFTC reach extreme values. Any analysis leads to one conclusion - the market cannot continue to raise or lower quotations as almost all free funds are in transactions. In this case, the analysis of the COT reports indicates that the market is "overheated" and it is necessary to "release steam" before starting to trade further.
As an example of a leading indicator, consider the dollar index futures situation. As we see on the chart, the price is pushed back from the local low when the positions of large players were almost zero. Thus, the analysis of the COT reports confirms that there will be no further fall and it is possible to start looking for entry points for the purchase.
Analysis of COT reports to determine overbought/resale
Defined in the same way as the corresponding technical instruments - when the amount of items of a certain level is reached, the reverse movement is started due to the end of the medium- and long-term trend and the current profit is fixed. In this case, Elliott waves can be used as an additional confirmation indicator.
In summary, COT reports may well be used to analyze the Forex market for at least the coming week. The futures market has a direct impact on spot and traders can use it as a leading signal given the following features:
It is better to use specialized services to view CFTC information and save time;
Analysis of COT reports as a leading or confirming indicator only makes sense in dynamics, i.e. the more historical data, the better the forecast. The best results are obtained on highly liquid currencies: EUR, USD, GBP, CHF, etc.;
The SOT perfectly confirms divergence and the beginning/end of the medium- and long-term trend. Under certain conditions, an extremely high open interest may indicate an entry point and, accordingly, in case of a sharp fall, we begin to record profit/loss;
Despite the fact that CME is one of the leading in futures and option trade, not all assets on it are sufficiently liquid for objective forecasts based on COT. For example, there is no point in looking for patterns in the movement of the Mexican peso or Indian rupee - work only on the main currencies.