Understanding Market Sentiment and the Commitment of Traders (COT) Report
When planning their next move on the markets, forex traders have a wealth of information sources and metrics at their disposal, with basic objective details such as product pricing data and financial reports being an ideal common-sense starting point.
In addition to these figures, however, its always useful to contextualise the latest facts in terms of how the individual participants on the foreign exchange market (of which there are millions) will respond — after all, it’s the choices of the traders themselves that ultimately affect the value of each instrument!
This is where the abstract, somewhat mysterious concept of ‘market sentiment’ comes in — so what does it mean?
What Do We Mean by ‘Market Sentiment’?
In forex, ‘market sentiment’ is the term used by analysts to denote the general feeling towards the trajectory of the market by investors and financial commentators, most often pertaining to whether the price of the asset in question is likely to appreciate or depreciate in the near future.
Each individual trader will have their own opinion on the state of play — on any given day some speculators will be bearish, whilst others will hold a more bullish view — depending on what factors they’re focusing on, coupled with their own personal experience. This feeling will inevitably be reflected in the trading choices they make in the near term, both in the type of position they open (be it buying, selling or abstaining for the time being) and the volume they choose put forward.
However, because forex is such a busy and highly liquid arena, even the highest-volume individual traders have a negligible influence on the direction of the markets by themselves. Indeed, any and all market movements are the result of all participants’ actions combined, with these shifts effectively being the manifestation of the dominant view (i.e. the feeling held by the majority of investors).
This is why market sentiment — being the traders’ collective wisdom regarding future changes — is such an important concept to be aware of, and one that can prove to be a useful additional factor to consider when combined with other types of data such as fundamental and technical analysis.
What is the ‘Commitment of Traders’ Report?
Even though market sentiment is a largely intangible notion that’s much harder to quantify than the concrete figures used in other types of forex research, investors can still infer shifts in attitudes through behaviour-related statistics such as the Commitment of Traders (COT) report.
Released by the Commodity Futures Trading Commission (CFTC) each Friday around 3:30pm US Eastern time — or 8:30pm GMT — the COT gives an aggregate of holdings across the futures market (both long and short contracts) from such key market participants as retail traders, hedgers and large investment bodies, thereby offering some valuable insight into how these prominent FX players have moved their funds around in the recent past.
This report, though pertaining to futures positions as opposed to spot FX, provides a snapshot of the state of play as of the Tuesday prior to each release (ie. three days beforehand). It is divided into four separate report sections — Legacy, Supplemental, Disaggregated, and Traders in Financial Futures — and is effectively the closest thing forex traders have to an outline of the overriding sentiment towards the market, making it of paramount importance to those looking to gauge pricing trends.
Unfortunately, no equivalent data for over-the-counter forex transactions currently exists due to the fact such trades rarely pass through a centralised exchange, rendering tracking and collating these activities a logistical nightmare!
Futher reading: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm
How to Make Sense of COT Reports
In order to access the latest COT report, simply head to the CFTC website and select ‘Commitments of Traders’ under ‘Market Data & Economic Analysis’ from the menu at the top of the page.
Alternatively, you can simply follow this link:
https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm
Once you’re on the page, scroll down until you find the ‘Current Legacy Reports’ section and find the Chicago Mercantile Exchange row — to view the report, select the ‘Short Format’ option from the ‘Futures Only’ column:
This will open up a page of lots of plain black-and-white text with all the latest figures for your perusal, though you needn’t sift through everything to find what you’re after; a straightforward CTRL+F search for the currency of your choice will take you there — for instance, try searching for ‘AUD’ for the Australian dollar:
Each of the figures given above corresponds to one of the eight categories shown at the top of each instrument breakdown, which are as follows:
· Commercial denotes the big businesses that have been trading futures this week, usually as part of a hedging strategy to protect themselves from financial losses
· Non-Commercial is essentially everyone else participating in the market, ranging from financial organisations, hedge funds and portfolio managers to individual retail traders
· Long shows the amount of long (buying) contracts identified by the CFTC since the last report was compiled, while Short shows the number of short (selling) contracts during the same timeframe
· Open Interest records how many of these contracts that are still open, ie. that have neither been delivered or closed
· Reportable Positions shows how many of the positions are significant enough to require disclosure to the CFTC, while Non-Reportable Positions shows how many were not (e.g. small positions opened by retail/hobby traders)
· Number of Traders indicates the number of participants on the market reporting their activities to the CFTC (as per industry regulations)
With this data, traders can clearly view how many futures/options speculators in each category behaved during the previous week and use this to assess their peers’ mindsets, which can be an invaluable point of reference in times of uncertainty.
Nevertheless — as always when it comes to the financial arena — there are no guarantees, and just because the majority of investors aligned with a certain speculative view over a period doesn’t mean that it’s certain to be accurate, so caution and further research on your own part is always a must!
Further reading: https://www.learningmarkets.com/understanding-and-trading-the-cot-report/
Use at your own risk disclaimer
The content contained herein does not construe any form of advice and the user must not take this as such. We do not accept any liability for the direct or indirect usage of the content held in this article. We strongly advise that you obtain independent financial, legal and tax advice before proceeding with any currency or spot metals trades.
