View COT report data directly in the ATAS platform charts

Let’s consider an example from the year 2019.

Number 1 shows how Commercials had an extremely negative opinion about the market future, since it was expressed ‘by deed, not by word’, namely, by the short position domination. Wheat was traded at that time above USD 550.

Commercials (красная) и Large Speculators (зеленая) как бы переплетаются.

Indeed, further price decrease to the USD 490-520 range confirmed that the price of more than USD 550 was too high and the fair price was lower. By the way, note that the Commercials line (red) and Large Speculators line (green) as if interleave with each other during the flat (between numbers 1 and 2).

Number 2 marks the opposite situation. When the price decreased to USD 470 and below, the red line moved up. It means that traders from the Commercials group started to open long positions since they decided that the current price was too low. Further development confirmed the correctness of their considerations because the quotations moved later to the range of the previous flat of USD 490-520.

By the way, the wheat futures market has its own agroindustrial specific nature. We have an individual article about wheat futures (ticker: ZW).

The above example showed that Commercials have a property to be proactive, predicting, in so doing, the future price. Let’s check this property through the natural gas market example.

Number 1 shows that a majority of traders from the Commercials group took long positions just before the price growth from 1.8 rather shrewdly in the summer of 2020.

Number 2 shows activities (although premature ones) in opening short positions in the fall of 2020.

Later (number 3), some Commercials successfully shorted the price leap in the winter of 2021.

However, the current (at the moment of writing the article) increase of the natural gas price has, according to this group of traders, potential for further development.

In general, we can say that the red line (which reflects the difference between long and short positions, opened by the Commercials group traders) could be used as the head-start reversal indicator. But of course, the indicator values cannot guarantee that the reversal is inevitable.

As a rule, the Large Speculators (green) and Commercials (red) lines demonstrate a reverse correlation. An idea arises that the Large Speculators representatives often make losses. Is it so?

It is obvious that not a single participant of exchange trading could be completely insured against losses, but if Large Speculators made losses in the end, they would go bankrupt and CFTC wouldn’t track their positions. But it is not so.

As a rule, Large Speculators are on the proper side of the market during a trend. COT data confirm the old trading saying: if there are no buyers left, prices cannot grow further and will start to go down. The opposite picture is true for the insufficiency of sellers.

Below is an example from the EUR/USD futures (ticker: 6E) market on the CME.

Large Speculators mainly held long positions during the uptrend from the summer of 2020 until the summer of 2021. However, every next peak on the indicator line is lower and lower. It turns out that Large Speculators act as if they support the trend and, when the support is exhausted, the trend ‘runs out’.

In this context, it is interesting to analyse positioning of different trader groups during the exchange panic in the spring of 2020, which stemmed from the coronavirus extension.

The chart below shows price dynamics of the popular E-mini futures asset on the Dow Jones stock index.

The green line shows as if Large Speculators expected a serious panic. Despite the stable growth of the contract price, they, most probably, took profit by longs, that is why we have the price and green line divergence (as it is marked by arrow 1).

It is interesting that Small Traders (blue line)responded to the market fall very quickly  by opening long positions sharply (as arrow 2 shows). However, they got into a trap and, most probably, they lost money during this fall.

The blue line shows the positioning of the least capitalized group of traders. They hardly possess power to influence market prices in any way, however, their behaviour may help to understand the market tone.

Moreover, Small Traders possess a special property in some markets. For example, Live Cattle futures. Many cattle farms get into the Small Traders category. Their activities (hedging or speculating) bring more weight to the opinion that the price is near its extreme points. It is demonstrated by circles in the chart below (ticker: LE; CME; daily period).

However, Small Traders are less successful in the gold futures market (below is the daily period chart for 2015-2016).

Note that we added the RSI indicator to the chart and selected Source = Indicator / COT Net Positions / Small Traders in the settings. It is required for analysis convenience, since the Small Traders values are not so large in the Commercials and Large Speculator context.

As regards RSI, 3 extreme points are seen better:

• panic of Small Traders, who sell on lows;
• excitement in the market, Small Traders buy the peak;
• and one more buy at peaks.

As you can see, Small Traders line values could be interpreted as the ‘to do the other way round’ signal.

Let’s remember that there are no guarantees that extreme points on the COT indicator lines ensure making profit. Nobody can avoid risks.

Perhaps, the main disadvantage of COT indicators is that they show data from the past. However, the delay is not that big for the values to lose their significance completely.

We offer you to consider the following variant of usage:

• Step 1. Identification of the signal on a senior time-frame with the help of a COT indicator.
• Step 2. Search for an entry on a junior time-frame with the help of clusters (or other ATAS platform indicators).

Example: USD/CAD currency pair in the forward market (ticker: 6C; CME).

We clearly see in the weekly chart (the screenshot above) that the Commercials indicator persuasively shows reversal points. Thus, traders of this group:

• accumulated short positions (number 1) long before the fall, which was caused by coronavirus, took place;
• gained understanding in time and accumulated longs (number 2).

That is why, when the Commercials values reached extreme points in May 2021, the reason to look for an entry point into shorts emerged.

We see an effort to break the round level of 0.83 on May 31 (1). As soon as the quotation exceeded this level, trading activity increased sharply. Perhaps, these were seller stops or maybe breakout buys. However, most probably, they were both. It is also interesting that the day closing took place below the level of 0.83. It is a bearish signal.

There was one more effort to overcome the level of 0.83 the next day (2). However, the weak activity (pale cluster colour testifies to it) could be interpreted as the absence of trader interest in a price increase (which is in line with the Net Positions COT indicator). That is why selling from the level of 0.83 looks justified.

There was one more such possibility on June 2, 2021 (number 3).

Further on, CAD entered the trading range below the level of 0.83 for several days without undertaking efforts of a bullish breakout. The market started to move down on June 10-11, which accelerated on June 16 when a US FRS meeting took place.

However, if you monitored the COT indicator and cluster dynamics, you could have taken an advantageous position many days before.

The Open Interest indicator shows the general number of open positions.
According to a widespread opinion, the following variants of interpreting Open Interest indicator signals are:

Bearish signals:

• Price decreases when indicator values increase (downtrend strengthening).
• Price increases when indicator values decrease (uptrend weakening).

Bullish signals:

• Price increases when indicator values increase (uptrend strengthening).
• Price decreases when indicator values decrease (downtrend weakening).

The Open Interest COT indicator shows in the chart below exactly the bullish nature of the silver market in the mid 2019. A number of open positions increase when the price increases. However, Open Interest decreased a bit during the intermediary correction.

It is interesting that the Large Speculators green line moved up since participants of this category, as a rule, support all continuous trends.

By the way, we have individual articles on how to use the Open Interest indicator. This subject is discussed in more detail in:

• How to use Open Interest.
• What Open Interest hides.

If you’ve got interested in COT indicators, read one more article from our blog on this subject. It contains ideas for trading COT Index.

Indicators, which are based on Commitment of Traders reports (COT reports), show positions of various trader groups in dynamics. It is a very useful instrument for middle-term currency, raw material and stock index trading.

ATAS platform helps users to:

• learn facts about positions of various trader groups from a trustworthy source (US CFTC);
• combine COT report data with cluster analysis;
• study historical indicator values;
• get ideas/confirmations for executing trading operations.

Keep in mind that these indicators:

• are published with a delay;
• cannot guarantee profit;
• possess individual nature depending on a selected market;
• contain data only for the markets, which are under CFTC regulation.

Nevertheless, despite the existing shortcomings, we hope that you properly assessed their potential for increasing efficiency of trading in popular markets.