The COT Report

[Black Swan]

Thought this might be of interest, particularly for the trainee (or confirmed) fundamentalists amongst us.. TBH (and IMHO) it's invaluable, whether or not you're hard-core TA like Kathy Lien...

Forecast The FX Market With The COT Report

Between 2001 and 2004, volume in the foreign-exchange market increased more than 50%, illustrating the overall rise in popularity of currency trading. The advent of online trading following the technology boom has allowed many equity and futures traders to look beyond their more traditional trading instruments. Most short-term traders or speculators trade FX based on technical analysis, so equity and futures traders who use technical analysis have made the switch to FX fairly easily. However, one type of analysis that traders have not been able to transfer over to currencies is volume-based trading.

Since the currency market is decentralized and there is no one exchange that tracks all trading activities, it is difficult to quantify volume traded at each price level. But in place of volume-based trading, many traders have turned to the Commodity Futures Trading Commission's Commitments of Traders (COT) report, which details positioning on the futures market, for more information on positioning and volume. Here we look at how historical trends of the COT report can help FX traders. (Find out how to gauge the psychological state of a currency market in Gauging Major Turns With Psychology.)

What is the COT Report?

The Commitments of Traders report was first published by the CFTC in 1962 for 13 agricultural commodities to inform the public about the current conditions in futures market operations (you can find the report on the CFTC website here). The data was originally released just once a month, but moved to once every week by 2000. Along with reporting more often, the COT report has become more extensive and - luckily for FX traders - it has also expanded to include information on foreign currency futures. If used wisely, the COT data can be a pretty strong gauge of price action. The caveat here is that examining the data can be tricky, and the data release is delayed as the numbers are published every Friday for the previous Tuesday's contracts, so the information comes out three business days after the actual transactions take place...

Forecast The FX Market With The COT Report

 

[GammaJammer]

the delay is not that much of a hinderance as it's really of use as a longer term fundamental tool. People look for positioning being stretched etc. So a 5 day delay really isn't the end of the world. There's some decent analysis out there by the banks as well on it. And while the cash FX market is still far far larger than the futures market, the gap grows a little smaller every day, so it's utility as a proxy for global volumes is only going one way.

GJ

 

[white_goodman]

Currently reading books by Larry WIlliams, Floyd Upperman and Stephen Briese... Strongly reccomend for all not just futures traders

 

[SAINT]

Large Speculators are Too Short US Dollars (COT)

Daily FX do a decent COT analysis. Positions were at or near a record in eur/gold etc, which brings the risk of bigger pullbacks if sentiment changes, due to the buildup of stop runs and unwinding, which then feeds on itself.

As you'll see in eur/usd price action, the best strategy is to follow the trend but be aware of the extreme longs if something changes.

The GBP rally in the last few days is a prime of example of a market looking one way. The mention of the BOE halting QE led to a large rally.

 

[Black Swan]

Large Speculators are Too Short US Dollars (COT)

Daily FX do a decent COT analysis. Positions were at or near a record in eur/gold etc, which brings the risk of bigger pullbacks if sentiment changes, due to the buildup of stop runs and unwinding, which then feeds on itself.

As you'll see in eur/usd price action, the best strategy is to follow the trend but be aware of the extreme longs if something changes.

The GBP rally in the last few days is a prime of example of a market looking one way. The mention of the BOE halting QE led to a large rally.

TBH as an overall subject this (COT) is my homework for the next few weeks.

 

[GammaJammer]

In what respect?

 

[Black Swan]

In what respect?

Not sure if this is aimed at me GJ but if it is it's my intention to gen up as much as poss. on the subject/add it to my overall personal knowledge base...

 

[white_goodman]

the problem is its not a balck and white creature like reading a stoch or something, def worth a read tho

 

[Black Swan]

the problem is its not a balck and white creature like reading a stoch or something, def worth a read tho

In my fledgling trading career I've tended to concentrate on a single subject of interest for a week or two in order to scrape the surface of knowledge on that subject...it's worked for me. In some respects I'm a slow learner but accept the odyssey of understanding I've set sail on..

Interesting that you mention indicators, over a 6 month period I added/tested/played around with various indicators (generally feeling my way around one every two weeks/month) until I had a basic understanding of what each one did (or didn't), singularly or otherwise. I'm at the stage now where most of them have been stripped off my charts as they're simply duplications..

The use of charts/indicators is essential but I'd suggest anyone of reasonable intellectual curiosity re. the markets needs to understand at a different level (ahem, a fundamental level ) why price does what it does. I've no illusions, I'm more than happy to pick up the crumbs brushed off the table and laps of the big players...just good to know when and why they're 'chucking' the breadsticks overboard.

 

[GammaJammer]

Haha nice analogy.

My comments stand on the value of the COT report - broad trends are the best thing to discern from this, don't try too hard to micro-analyse the data. But as a proxy for the broader market I think it's value is gradually rising.

 

[luckyd1976]

I'm with GJ on the COT. It's just one of those things to tuck into the Toolbox when your looking at the data. It's got more value to the LTerm Fundy traders that kind contrairian the report.

Not really a STerm income trading tool

 

[GammaJammer]

Reason I think it's valus is rising is that both exchange volumes are increasing AND the amount of noise in those positions has decreased in the last couple of years (i.e. the froth represented by Mrs Watanabe et. al. has been well and truly blown off the top of the cappucino cup for now).

As far as I can tell the quality of those spec positions is a touch higher now at the margin.

That's very much just my $0.02 though fwiw

GJ