What Are the Big Boys Up To?
How to Use the Commitment of Traders Report in Your Trading
By Jim Wyckoff

I have discussed in past articles how volume and open interest can be used to help identify and confirm market situations and trading opportunities. I'll take open interest one step further in this article by examining the Commitments of Traders (C.O.T.) report, issued by the Commodity Futures Trading Commission (CFTC).

The C.O.T. report is released weekly--every Friday afternoon. There is also a C.O.T. report that includes options on futures issued at the same time. The report that includes options is not as closely followed as the report that covers only futures. Reason: The combined futures and options report has less history.

The C.O.T. reports provide a breakdown of each Tuesday's open interest for markets in which 20 or more traders or hedgers hold positions equal to, or above, reporting levels established by the CFTC.

The C.O.T. report breaks down by open interest large trader positions into "Commercial" and "Non-Commercial" categories. Commercial traders are required to register with the CFTC by showing a related cash business for which futures are used as a hedge. The Non-Commercial category is comprised of large speculators--namely the commodity funds. The balance of open interest is qualified under the "Non-reportable" classification that includes both small commercial hedgers and small speculators.

What is most important for the individual trader (you) to examine in the reports is the actual positions of the categories of traders--specifically the net position changes from the prior report. To derive the net trader position for each category, subtract the short contracts from the long contracts. A positive result indicates a net-long position (more longs than shorts). A negative result indicates a net-short position (more shorts than longs).

Now, if I've got many of you lost at this point, DON'T WORRY. I've got some suggestions later on that allow you to look at some examples of reports on other websites. What I'm trying to do at this point is familiarize you with the general basis of the report, related terminology and how traders use the C.O.T. report. This stuff will sink in--it just takes a little while.

My friend, Steve Briese, is one of the world's foremost experts on C.O.T. data. He publishes the "Bullish Review," which comes out right after each C.O.T. report. It is from conversations with Steve through the years and reading some of his material that I have learned about the C.O.T. report and its value to traders.

The most important aspect of the C.O.T. report for most traders is the change in net positions of the commercial hedgers. Why? Because studies show that commercials hold a superior record to other trading groups in forecasting significant market moves. The large commercials are generally believed to have the best fundamental supply and demand information on their markets, and thus position their trades accordingly. Along with the advantage of having the best fundamental supply and demand information on their markets, large commercials also trade large size, which in itself moves markets in their favor.

It's important here to note that whether a particular trader group is net long or net short is not important to analyzing the C.O.T. report. For example, commercials in silver are the producers and they have never been net long, because they hedge their sales. In gold, however, the commercial mix is more heavily weighted toward fabricators who buy long contracts as a hedge against future inventory needs. So, again you need to look at the net change in positions from the previous report or several of the recent reports.

Individual traders that consider positioning themselves on the same side of the market as large commercials, when the large commercials become one-sided in their market view, is the best way to utilize the C.O.T. report.

Some traders do like to take the opposite sides of the trades on which the small trader (non­reportable positions) in the C.O.T. reports are shown taking. This is because most small speculative traders of futures markets are usually under-capitalized and/or on the wrong side of the market.

Also, some traders will also follow the coat-tails of the large speculators, thinking the large specs must be good traders or they would not be in the large trader category.

Briese says that contrary to what some believe, divergences from seasonal open interest averages in C.O.T. report data are not reliable trading indicators. This is even true with agricultural markets, where one would suspect that hedging is a seasonal consideration.
For more information on the C.O.T. reports, check out the Internet websites www.bullishreview.com or www.cftc.gov. 

Jim Wyckoff became a financial journalist with Futures World News for many years, cutting his teeth as a reporter on the futures trading floors in Chicago and New York, where he covered every futures market traded in the United States at one time or another including commodity futures trading in Softs and Metals.  Click here for full bio >>