How big are the Big Players

[Zack Zarr 5]

Information about Big Players’ Trades-COT

 

I have mentioned about the importance of following what the Big Players are doing over and over in my book and here in our forum. As I mentioned in the previous post, the chart is the first and most trustworthy source that provides information about the actions of the institutions. Many things can be learned by just looking at the right places on the chart. As you see in this post, the large body candles are the most prominent features that should be paid attention to. However, the method of approaching towards a possible reversal zone is also important as I explained in the book.

 

There is also another piece of information which contains useful information and is readily available to the public. Every week, the Commodity Futures Trading Commission (CFTC) releases data about the size of trades taken by the large institutions. These large institutions are required to report their above certain size positions on futures of certain commodities, indices and currencies on a daily basis. The CFTC then compiles all these data up to each Tuesday of the week and release to public at the end of Friday trading day around 3:30PM EST. Why would they do that? “To help the public understand market dynamics” they say on their website. This report is referred to as the Commitments of Traders (COT).

 

Where to find the reports?

 

Open the CFTC website here and head to the Market Data & Analysis tab and select the Commitments of Traders. There page contains all the necessary information and explanatory notes for further study and understanding the terminology. Below is a snapshot of the current layout of the COT page which was changed a year or two back:

 

 

Important parts of this page are the explanations as well access to the historical data dating back to 1986.

 

The CFTC provides this information in a categorized format (as categorized as they can) based on the purpose of each trader when opening these positions. The nature of each trader's business which is also reported to CFTC determines the dominant classification of each institution. In its most conventional format, the Legacy report is what has been around since almost the beginning. Scroll down the page to see the types of reports and some explanations related to each classification:

 

 

In the legacy report, there are two major classifications of traders: Commercials vs. Non-Commercials. The internet if loaded with information about the role of each class in moving the price and how they operate. I want to keep my post short so I keep it brief. Commercial traders are those who are “engaged in business activities hedged by the use of the futures or option market” according to CFTC. This group includes the large producers of commodities or financial institutions hedging against future prices. These are the people who actually sell their products in the market at high price and buy it back at a lower price. In essence, these are the people who know the most about their products and what those products are worth.

 

On the other side of the market, there are non-commercial traders who are often referred to as “large speculators”.  These are the institutions such as banks, investment and money managers and hedge funds who take the other side (buy side) of trade. These entities are highly profit driven and speculate on the future prices. They tend to be trend followers and are most bullish at the end of a bull market and most bearish at the end of bear market.

 

In the legacy report, there is another category called non-reportable. This is referred to as a class of traders who their position size does not meet the CFTC criteria. Essentially these are “small speculators” who are often on the wrong side of the trade. That being said, the numbers in this category represent the “retail” sentiment since you and I also part of the retail traders. Similar to the non-commercials, these are also trend followers and due to the smaller size of their positions, they can change their positions in much faster way than the large speculators.

 

Another important piece of information in the legacy report is the “open Interest”. This is the total number of futures contract entered into the market. Think of it as the total number of shares outstanding during each week [in the world of stock trading]. It could be seen as a gauge of the market sentiment.

 

Where to get the legacy COT report?

 

Scroll down the page until you see the table titled “Currency Legacy Report”. The table looks like the picture below. The Chicago Mercantile Exchange (CME) is where you find the most relevant report for currencies and commodities. 

 

What does the legacy COT report look like?

 

The picture below is a snapshot of a legacy report for March 27, 2018 for the GBP. As you scroll down this report, you will see the numbers for futures position of different currencies. This is a text based tabulated file which contains the size of positions (long, short) for each category of traders as well as the change in those positions compared to the last reporting week, the open interest and some other information.

 

 

The basic conclusions from this weekly report are as follows:

 

The net position: the net difference between the long and short positions will tell you the bias direction of each classification of traders. For instance, in the snapshot of the GBP above, the non-commercials are net long (larger size of long vs. short positions). Expectedly, the commercials are on the other side of the trade and are net short. The small speculators or non-reportables also follow the large speculators and are net long.

 

The change: Another important piece of information is the change in positions from the past week. In the example above, the non-commercials added above 18K contracts to their longs while they only added around 8K to their shorts. By just seeing these two numbers, it is easy to deduce that the non-commercials are adding to their exposure hoping for more upside movement in GBP; they are increasing the percentage of long GBP contracts in their portfolio. The commercials are doing the opposite: they decreased their longs and added to their short. The non-reportable group added to their both long and short with longs being slightly higher.

 

The percent of open interest in each category is also shown in this table. It is simply the number of each position divided by the total open interest which signifies the relative size of trades in each category.

 

Is this information enough to make decisions for the upcoming week?

 

There are many articles regarding the fact that the COT is not much useful because it comes with a delay. The information belongs to the past week and what might have happened has already happened. That is a true statement when looking at the price in a short-term perspective. You CANNOT make intraday decisions based on the COT report.

 

Also, looking at a single report does not make much of a difference in making trade decisions. It is very helpful to know whether if the big institutions have changed their mind within the past week or not. However, such changes do not occur in the period of a week as the size of their positions requires much longer time and much smarter process. I will go over more details of how to utilize the COT data to our advantage in the upcoming posts. We need to cover the basics first and foremost before that though. Next is the new format of reporting the data which has more categories and different structure.

 

Zack