Commitments of Traders Report

Our treatment of open interest would not be complete without mentioning the Commitments of Traders (COT) Report, and how it is used by futures technicians as a forecasting tool. The report is released by the Commodity Futures Trading Commission (CFTC) twice a month-a mid-month report and one at month's end. The report breaks down the open interest numbers into three categories-large hedgers, large speculators, and small traders. The large hedgers, also called commercials, use the futures markets primarily for hedging purposes. Large speculators include the large commodity funds, who rely primarily on mechanical trend-following systems. The final category of small traders includes the general public, who trade in much smaller amounts.

The guiding principle in analyzing the Commitments Report is the belief that the large commercial hedgers are usually right, while the traders are usually wrong. That being the case, the idea is to place yourself in the same positions as the hedgers and in the opposite positions of the two categories of traders. For example, a bullish signal at a market bottom would occur when the commercials are heavily net long while the large and small traders are heavily net short. In a rising market, a warning signal of a possible top would take place when the large and small traders become heavily net long at the same time that the commercials are becoming heavily net short.