Analysis of COT reports is one of the most popular methods for analyzing the dynamics of currency pairs in the forex market.
However, does the analysis of currency futures in the format of the weekly reports of the Commodity Futures Trading Commission have a practical advantage for trading in the foreign exchange market? Let’s understand.
US Commodity Futures Trading Commission – (U.S. CFTC) is a US government body that monitors the implementation of the commodity exchange act. The main purpose of the Commission’s activities is to protect market participants and their clients from fraud and abuse in trading commodity and financial futures and options, and to encourage a competitive market for futures and options. Thus, the Commission ensures that there are no offenses in trading in the futures market.
The Commodity Futures Trading Commission includes five people. They are appointed for a five-year term by the President of the United States on the recommendation and with the approval of the Senate. The Chairman of the Commission from the appointed five members is also chosen by the President and approved by the Senate. At the same time no more than three members of the Commission can be members of the same political party.
In order to implement the law on commodity exchanges, all major participants in the futures market report to the Commission on a regular basis. In turn, this Commission puts free access reports, which are called “Commitments of Traders” or abbreviated COT reports. Currency futures are part of the derivatives market and currency futures traders also provide regular reports to the Commission. Trade in currency futures in the US is carried out on the Chicago Mercantile Exchange (CME), which in turn is part of the CME-Group. And, accordingly, we can see COT reports for all currencies traded in currency futures.
The CFTC publishes COT reports every Friday, around 2:30 pm North American Eastern Time (22-30 Moscow time) and contains information as of the last Tuesday. Thus, the time gap in the information received is 3 trading days.
To see the latest COT reports on the main currency futures you need to go through the link – Commitments of Traders.
Next, scroll down and find the “Current Legacy Report” section. Click on the link in the row next to “Chicago Mercantile Exchange” – “Short Format” in the “Futures-only” section – if you want to see information only on futures. Or the link “Futures-and-Options-Combined“. Next, you need to scroll down the page and find the currency you need on it. I remind you, in the futures market, contracts are traded for a specific currency, and not currency pairs as forex. I chose the euro, and as a result, we will see here such a report.
The COT reports contain information on long and short positions of traders and their changes in the last reporting period for both hedgers (Commercial) and large speculators (Non-Commercial). Net position is the difference between the number of contracts for buying and selling. Open interest is the sum of all open positions in the market for a given asset.
A full description of all positions of the report and their meaning can be studied on the relevant CFTC page. I will focus on the basic positions interesting for traders on Forex.
Large Non-Commercial speculators are large private traders, hedge funds and large financial institutions. For the most part, these traders are aimed at generating speculative returns. Trade is usually a trend. Unlike hedgers who are not interested in making a profit from futures trading on the exchange, speculators are aimed precisely at making a profit, and not at protecting against price fluctuations in the prices of underlying assets. Thus, in order to obtain information on the prevailing trend in the foreign exchange market, we need to analyze precisely the positions of the large speculators (Non-Commercial).
Hedgers (Commercial) – a large business using futures for their intended purpose – as a tool for hedging and protecting against sharp fluctuations in the price of underlying assets. Open their positions against the main trend.
Thus, from the analysis of the COT report, we can get the following information useful to us (the numbering corresponds to the blue digits in the picture above):
- The report contains information as of April 24, and we saw the report on the evening of April 27 (difference of three days).
- Positions of Long and Short of large speculators (Non-Commercial). In our case, 216,944 Long contract and 86,350 Short contracts.
- If we subtract Short contracts from the number of Long contracts, we will get net Long positions – 130 594 (216 944 – 86 350). This figure, as a rule, is of the greatest interest. It is published on many forex online resources, for example, in Economic Calendar of the site Investing.com for Friday or on the resource ForexLive. Comparing the net Long positions with similar data for the previous period, we will get a change in Long positions over the last week. Based on this, one can draw a conclusion about how the position of the main traders on a particular currency in the futures market changes.
- The next line of the “Changes from” report contains changes to the Long and Short items compared to the previous report. We see that Long positions fell by 21,885 contracts, Short positions decreased by 1,003 contracts. The same number of changes in the net positions of Long for the last week we can get if subtracted from Long change of Short change. In our case this is 20 882 = – 21885 – (-1003). As a result, we see that Long net contracts fell by 20 882 contracts for a week.
- Let’s also pay attention to the number of traders in each category, who submitted relevant reports to the Commission. In our case, we see that 105 traders are in the Long position on the euro in the futures market. This is significantly less than the number of large traders in the foreign exchange market.
Well, we quickly analyzed the COT report on the euro. The main information we got as a result is that the number of Long contracts (216 944) in the futures market is much higher than Short contracts (86,350) and for the last week, Long net position was reduced by 20,882 contracts. And we received this information on Friday evening.
And now let’s impose the date of receiving information on the change of contracts on the EURUSD pair price chart and see what this gives us in practical terms for making decisions about opening trading positions on Forex.
We know that the euro is in a strong uptrend and the long positions of traders in the futures market are at historic highs. The penultimate COT report showed us an increase in Long net positions by 4,000 contracts (+4,0 K), the latest report gave us information on the reduction of Long net positions by 20,882 (-20,8 K) contracts. We will put this information on the chart.
The red vertical lines mark the release dates of the COT reports – the last two Fridays. The blue vertical lines are the periods for which the COT reports contain information. Thick blue lines marked dynamics in net long positions in the futures market. The red lines are the dynamics of the EURUSD pair on Forex. Last Friday, we learned that traders increased Long contracts, which, given the growing trend for the euro, gave us information about the continuation of the trend upwards and the need to find euro purchases on forex. However, the euro for the entire reporting period was in flat. And before the last COT report, euro began to decline. And euro continued to fall the last week. And in accordance with the reports of COT, we had to expect the continuation of the growth of the euro, or at least outset.
The latest COT report tells us about the decrease of long positions on the euro, and indeed, the euro declined on the forex all the reporting week. But we received this information too late and for us it is useless at the moment. We simply received confirmation that the Large Non-Commercial traders are trading in the futures market in accordance with the current trend in the foreign exchange market. And that’s all. Then they are speculators. No other useful information on the likely future trend on the EURUSD currency pair is given to us by the COT reports. I notice this tendency for the analysis of COT reports for a long time.
Can we approve on the basis of the latest COT report that traders will continue to close the Long position for the euro and the euro will continue to decline on Forex? I would not rush. To whom is it given to know the future? Traders in the futures market are the same people as forex traders. And they also analyze the currency market, as well as forex traders do and make decisions in real time depending on the incoming information. And they are just as mistaken. And there are no grounds for perceiving them as more “smart” traders and you can read about it in the article “Psychology in Forex – Can You Believe Experts and whether there are “Smart Money”. Yes, there is a historical dependence that when the number of open contracts on futures reaches the maximum values, we can expect a reversal of the previous trend. But are you ready to trade against the trend based on this knowledge? Me not.
Summarize. In my opinion, the analysis of COT reports for real trading in the forex market is absolutely useless. Even more. It is dangerous, because it creates a false illusion of the possible future dynamics of a currency based on past and outdated data. Finding dependencies and reversals of trends on historical data is quite simple. But we are trading the future, and the likely future and COT reports will only confuse us. By combining the charts of positions in the futures and dynamics market in the foreign exchange market, we will get a strong correlation, but this information comes from the CFTC reports too late.
Pay attention to the following. One futures contract is 125 000 Euro in accordance with its specification. The same information is also indicated in the COT report. The total number of Long contracts of large speculators is 216,944. That amounts to 27.1 billion euros. This is a relatively small amount, if it is compared with the turnover on Forex. Only the daily turnover of the forex market in euros is 1-2 trillion dollars. Thus, the futures market is more likely to focus on the currency market than on the turnover. Given the information from COT reports when opening positions on forex, we not only use the belated and outdated information, but also confuse the cause with the investigation. We are more likely to predict the dynamics of changes in net positions in the futures market based on the dynamics of currency on Forex than on turnover. For example, for the next COT report, traders will pass information to the CFTC two trading days from now (today is Saturday, Monday and Tuesday) and next Friday we will see the next COT report. I forecast, based on the current dynamics of the euro, that it will contain a further reduction in the euro net Long positions. And on Friday I’ll write in the comments, whether I was right or not.
Concerning the analysis of COT reports on Forex, the KISS method should be fully used – (the acronym for “Keep It Simple, Stupid”). This principle states that most systems work best if they remain simple, not complicated. Try easier to analyze the foreign exchange market and do not complicate your life with unnecessary and outdated information.
But this is only my opinion. If you have another experience or you know how to correctly extract useful information from COT reports and analyze it – write in the comments. It will be interesting and useful for all readers of our site.
The next trading week is over. As I promised, I spread information about the net long positions for the euro. They decreased from 130.6 to 120.6. This once again proves that the analysis and use of information from CFTC COT reports absolutely does not have any practical advantage for real trading in the forex market.
“Trade what you see”.
Be prudent, observe risk management and trade in a plus.