Trading is knowledge, and you gain this knowledge through various reports and publications. These reports offer critical insights into market trends and sentiment that allow traders to make informed decisions. Among the several popular trading publications is the COT report, which is a crucial resource for anyone involved in futures trading.

Through this article, we will explain the different types of COT reports: Legacy, Supplemental, Disaggregated, and Traders in Financial Futures (TFF). We’ll break down how to read and interpret the COT report, besides explaining key components like long and short positions and open interest. 

Also, you’ll understand the pivotal roles played by the market’s key participants: commercial traders like farmers, who use futures contracts for hedging, and non-commercial traders, such as speculators, who are driven by profit from market movements. At the same time, we will see how their actions impact market dynamics. To enhance your trading acumen, we’ll also share practical applications of the COT report, including trend identification and contrarian trading strategies. Let’s begin. 

What is the Commitment of Traders (COT) Report? 

The Commitment of Traders (COT) Report is a weekly report released by the Commodity Futures Trading Commission (CFTC). It involves a detailed breakdown of various positions held by different types of traders in the futures markets. 

The primary purpose of the COT report is to enhance market transparency by offering insights into the:

• Trading activities 

and

• Positions of various market participants.

This transparency helps traders and analysts understand market dynamics and make informed decisions. Let’s have a look at some major components of a COT report:

• Market Participants:
  • Commercial Traders
    • These are entities that use the futures market primarily for hedging purposes.
    • This hedging helps them mitigate the risk associated with their business activities.
    • For example, a wheat producer might use futures contracts to lock in a price for their future harvest to protect against price fluctuations.
  • Non-Commercial Traders
    • Also known as speculators, these traders are not directly interested in the physical commodity.
    • Instead, they seek to profit from price movements in the futures market.
    • This group includes large institutions, such as hedge funds and investment managers.
  • Non-Reportable Positions
    • This category includes smaller traders whose positions do not meet the reporting thresholds set by the CFTC.
    • Mostly, they are individual traders or small firms.
• Data Breakdown:
  • The report details the following positions held by each category of traders:
    • Long positions (reflecting buying interests)
    • Short positions (indicating selling intentions)
    • Spread positions (Representing a combination of long and short positions to benefit from price differentials.)
  • This component of the COT report includes the number of traders in each category and the changes in their positions from the previous week.

It is essential to note that by examining the COT report, market participants can gain insights into the:

• Market sentiment 

and

• Potential future movements in the futures markets

For example, 

• A significant increase in long positions by commercial traders indicates hedging activity against expected price increases.
• On the other hand, an increase in short positions by non-commercial traders suggests a bearish outlook.

4 Types of COT Reports 

The Commitment of Traders (COT) Report comes in several formats. Different formats provide different levels of detail and cater to various types of market analysis. 

Let’s understand each of these reports in detail:

I) Legacy Report

The Legacy Report is the original COT report. It provides a basic breakdown of open interest by trader type and categorizes traders into:

• Commercial Traders: Those who use futures markets to hedge their business activities.
• Non-Commercial Traders: Speculators who seek to profit from market movements.
• Non-Reportable Positions: Smaller traders whose positions are below the reporting threshold.

The Legacy Report is straightforward and offers a high-level view of the market. It lets users see the overall positioning and sentiment among major market participants.

II) Supplemental Report

The Supplemental Report includes data on “selected agricultural commodities”. It offers more granularity compared to the Legacy Report. This report provides a detailed view of the open interest and positions in major agricultural products, such as corn, soybeans, and wheat.

This report helps market participants gain deeper insights into the agricultural markets as it focuses on specific commodities that are crucial for both producers and consumers.

III) Disaggregated Report

The Disaggregated Report offers a more detailed breakdown of market participants into specific categories:

• Producer/Merchant/Processor/User: Entities that deal directly with the commodity in their business operations.
• Swap Dealers: 
  • This category includes participants who deal primarily in swaps.
  • They use the futures market to hedge those positions.
• Managed Money:
  • It includes institutional investors, such as hedge funds and other money managers.
  • They usually trade futures for speculative purposes.
• Other Reportables: This category represents traders who do not fit neatly into the other categories but have large enough positions to be reported.

This report provides a clearer and more comprehensive view of the various roles that participants play in futures markets.

IV) Traders in Financial Futures (TFF) Report

The Traders in Financial Futures (TFF) Report focuses on financial futures markets. It provides data on:

• Interest Rates: Futures on instruments like Treasury bonds and Eurodollars.
• Currency Futures: Contracts involving different currencies.

The TFF Report is essential for understanding the positions and activities in the financial futures markets. Most analysts and traders refer to it to make informed decisions regarding:

• Interest rate 

and

• Currency trends.

Key Participants in the COT Report 

It is essential to note that the COT report categorizes traders into:

• Commercial Traders,
• Non-commercial Traders, and
• Non-reportable positions.

By categorizing traders in this way, the COT report provides a comprehensive view of market dynamics. This view helps analysts and traders understand the behavior and intentions of different market participants. To gain a better understanding, let’s study the different categories of traders:

Category I: Commercial Traders

Commercial Traders are entities involved in the:

• Production,
• Merchandising,
• Processing, and
• Direct use of the commodity.

These participants use futures contracts primarily for hedging purposes. Their primary goal is to mitigate risks associated with price fluctuations in the underlying commodity.

For Example: 

• A wheat farmer uses futures contracts to hedge against the risk of price changes in their crops.
• They sell wheat futures contracts to lock in a selling price for their upcoming harvest
• This helps ensure that the farmer receives a predictable income regardless of whether the market price of wheat falls.

Category II: Non-Commercial Traders

Non-Commercial Traders are primarily speculators, such as:

• Hedge funds,
• Financial institutions, and
• Independent traders.

Unlike commercial traders, their primary objective is to profit from price changes in the futures markets rather than to hedge against physical market exposure.

For Example

A hedge fund analyzes market conditions and economic indicators to forecast price movements in oil futures. Now, there could be two possible situations:

The oil prices will increase.	The oil prices will drop.
If the fund anticipates rising oil prices, it will take long positions in oil futures contracts. This will help the fund profit from the expected price increase.	Conversely, if it expects prices to drop, it will take short positions.  This will help the fund benefit from the decline.

 

Category III: Non-Reportable Positions

Non-reportable positions represent smaller traders whose positions do not meet the CFTC’s reporting thresholds. Although these traders’ individual positions are not large enough to be reported separately, they are included in the aggregate data of the COT report.

For Example

• Say an individual retail trader speculates on gold futures with a few contracts.
• While their positions are relatively small compared to large institutional traders, the collective activity of these smaller traders can still impact market trends.
• Thus, they are reflected in the overall open interest and positioning data.

Example: Speculators vs. Farmers 

It is noteworthy to state that in the futures markets, different types of traders have distinct motivations and strategies. Read the table below:

Commercial traders	Non-commercial traders
Commercial traders, such as farmers, primarily use futures contracts to hedge against price volatility in their commodities.	Non-commercial traders, such as speculators, aim to profit from price movements.

 

Thus, examining the contrasting behaviors of these two groups:

• Provides insight into market dynamics 

and

• Highlights the different roles they play in the financial ecosystem.

Let’s understand their trading behaviors through hypothetical examples:

Example I: Farmers (Commercial Traders)

For the unaware, farmers are a type of commercial traders. They use futures contracts to hedge against potential price drops in their crops. By locking in prices, they aim to ensure financial stability regardless of market volatility. 

Example of Hedging:

• Scenario
  • A wheat farmer expects to harvest 10,000 bushels of wheat in six months.
  • The current market price for wheat is $5 per bushel.
  • However, the farmer is concerned that prices might drop by the time of harvest.
• Action
  • To hedge against this risk, the farmer sells wheat futures contracts at the current price of $5 per bushel.
  • By doing so, the farmer locks in a selling price for the wheat crop.
• Outcome
  • Let us assume that the market price of wheat falls to $4 per bushel at harvest time.
  • Now, the farmer can still sell the wheat at the previously locked-in price of $5 per bushel through the futures contracts. 
  • This hedging strategy protects the farmer from losing revenue due to the price drop.

Speculators (Non-Commercial Traders)

Speculators are a type of non-commercial traders. As the name suggests, they engage in futures markets to profit from price movements rather than to hedge against risks. 

Example of Speculation:

• Scenario
  • A hedge fund analyzes market data.
  • It predicts that wheat prices will rise due to anticipated supply shortages.
• Action
  • The hedge fund takes long positions in wheat futures.
  • It buys contracts at the current price of $5 per bushel with the expectation that prices will increase.
• Outcome
  • If wheat prices rise to $6 per bushel, the hedge fund profits by selling the futures contracts at a higher price.
  • Conversely, if prices fall, the hedge fund incurs a loss.

How Do Speculators Impact Market Volatility?

• Price Movements
  • The actions of speculators can drive market prices up or down based on their trading volumes and positions. 
  • For example, 
    • Say many speculators anticipate a price rise. 
    • They buy futures contracts.
    • Their collective buying pushes prices higher.
• Volatility
  • Speculators’ reactions to market news and trends often lead to increased volatility.
  • Rapid buying or selling in response to new information causes swift and significant price changes.
  • These price changes significantly impact other market participants.

How to Read and Interpret the COT Report 

Numerous studies have shown that the Commitment of Traders (COT) Report is a valuable tool for traders and analysts. That’s because it provides information related positions and sentiments of various market participants in the futures markets. Also, it breaks down the positions held by different types of traders and provides insights into potential:

• Market trends 

and

• Shifts.

Effective usage of the COT report is a three-step process. See the graphic below:

Let’s understand these steps in detail:

Step I: Accessing the COT Report

• From the CFTC Website:
  • Visit the CFTC website at www.cftc.gov.
  • Navigate to “Market Reports” and select “Commitment of Traders.”
  • Choose the type of report you are interested in (e.g., Legacy, Supplemental, Disaggregated, TFF).
  • Select the specific market or commodity you want to analyze.
• From Financial Information Platforms:
  • Platforms like Bloomberg, Reuters, and various financial news websites often provide access to the COT reports.
  • Search for “Commitment of Traders Report” along with the specific commodity or financial instrument you are interested in.

Step II: Interpreting the Data Columns

The COT report contains several key columns that provide insights into the positions held by different types of traders. Let’s understand them:

• Long Positions: The number of contracts in which traders have committed to buying the commodity in the future.
• Short Positions: The number of contracts in which traders have committed to selling the commodity in the future.
• Changes from the Previous Week: Indicates the increase or decrease in long and short positions compared to the prior week.
• Open Interest: The total number of outstanding futures contracts for the commodity.

Please note that these columns are usually broken down by trader type (commercial, non-commercial, and non-reportable positions).

Step III: Interpreting the COT Report

The last step in the process of effectively using COT reports is “interpretation”. Most traders who interpret this report gain crucial insights into:

• Market sentiment,
• Potential future price movements, and
• The behavior of commercial and non-commercial traders.

Let’s understand all these steps better through an example related to the interpretation of the COT report for crude oil:

• Access the Report:
  • Navigate to the COT section on the CFTC website.
  • Select the Disaggregated Report for crude oil.
• Data Analysis:
  • Look at the latest report.
  • Identify the long and short positions for each category of traders:

Commercial Traders (Producer/Merchant/Processor/User):	Non-Commercial Traders (Managed Money):	Swap Dealers and Other Reportables
If commercial traders have a significant number of short positions, it suggests they are hedging against potential price drops in crude oil.	If speculators have increased their long positions significantly, it indicates bullish sentiment, as they are betting on price increases.	Evaluate their positions to get additional context on market expectations.

• Interpreting Market Sentiment:
  • Increasing Long Positions by Non-Commercial Traders
    • Indicates optimism and an expectation of rising prices
    • For example,
      • Say managed money traders are increasing their long positions in crude oil.
      • This reflects expectations of higher demand or geopolitical tensions affecting supply.
  • Increasing Short Positions by Commercial Traders
    • Suggests that producers or merchants are hedging against the risk of falling prices. 
    • For example,
      • Say oil producers anticipate a price decline due to excess supply
      • In such a situation, they may increase their short positions.
  • Changes from the Previous Week
    • Sudden increases or decreases in positions indicate shifts in market sentiment. 
    • A substantial rise in long positions among speculators compared to the previous week suggests new bullish developments in the market.

Now, let’s continue with our example and have a look at the report data in the table below:

Managed Money Long Positions	Managed Money Short Positions	Commercial Traders Long Positions	Commercial Traders Short Positions	Open Interest
300,000 contracts (an increase of 20,000 from last week).	50,000 contracts (a decrease of 10,000 from last week).	100,000 contracts (steady).	400,000 contracts (an increase of 15,000 from last week).	1,000,000 contracts

Interpretation:

• The increase in long positions by managed money and the decrease in their short positions indicate bullish sentiment among speculators
• This data suggests they expect crude oil prices to rise.
• The steady long positions and increased short positions by commercial traders imply they are hedging more against the risk of price drops.
• This situation reflects a cautious outlook.
• Overall, the market is experiencing mixed sentiment with:
  • Speculators betting on rising prices and
  • Producers preparing for potential declines

Practical Applications of the COT Report in Trading 

The Commitment of Traders (COT) Report analyzes the positions of commercial and non-commercial traders over time. By using it, traders can:

• Identify emerging trends 

and 

• Make informed predictions about future market movements.

Additionally, the COT report supports contrarian trading strategies. For the unaware, by following these strategies traders take positions opposite to the prevailing sentiment indicated by non-commercial traders. Let’s understand the practical applications of COT report in detail:

Help in Identifying Trends

Traders can use the COT report to identify market trends by analyzing the positions of:

• Commercial traders and
• Non-commercial traders

Let’s learn how to do it:

• Trend Analysis:
  • Commercial Traders
    • In most cases, the positions of commercial traders reflect hedging activities.
    • A consistent increase in commercial short positions indicates that producers expect lower prices in the future which suggests a bearish trend.
    • Conversely, increasing long positions signal expectations of higher prices.
  • Non-Commercial Traders
    • On the other hand, the positions of non-commercial traders are often driven by speculative motives.
    • A steady increase in non-commercial long positions suggests:
      • Bullish sentiment and
      • The expectation of rising prices.
    • Conversely, increasing short positions indicate bearish sentiment.
• Historical Comparison:
  • By comparing current data with historical positions, traders can identify shifts in market sentiment. 
  • For example,
    • Assume that non-commercial traders have historically held more long positions.
    • Now, this trend starts to reverse.
    • This kind of information signals a potential market downturn.

Example of Trend Identification

Scenario	Action
Say over the past few months, non-commercial long positions in gold have been steadily increasing. At the same time, short positions have been decreasing. This trend suggests growing bullish sentiment among speculators.	A trader decides to take long positions in gold futures. By doing so, they align with the speculators’ bullish sentiment and are anticipating further price increases.

 

Contrarian Trading Strategies

As discussed above, the COT report can also be used for contrarian trading strategies. This approach is based on the idea that when speculator sentiment reaches extreme levels, a market reversal is likely. You can practice this strategy by identifying the extremes as follows:

Bullish Extremes	Bearish Extremes
Say non-commercial long positions are at historically high levels. This situation shows overbought conditions. Now, a contrarian trader will take short positions in expectation of a price correction.	Say non-commercial short positions are at historically high levels. This situation suggests oversold conditions. Now, a contrarian trader will take long positions in expectation of a price rebound.

 

Example of Contrarian Trading:

• Scenario
  • The COT report shows that non-commercial traders hold an exceptionally high number of long positions in crude oil.
  • On the other hand, commercial traders have significantly increased their short positions.
• Action
  • A contrarian trader, noticing this bullish extreme, decides to take short positions in crude oil futures.
  • The trader believes that the market is overbought and is due for a correction
  • This belief gains further strength from the fact that commercial traders (who are considered “smart money” due to their market expertise) are heavily shorting the commodity.

Conclusion 

The Commitment of Traders (COT) Report is essential for anyone involved in futures trading. It provides a clear view of the positions held by different market participants and helps traders understand market dynamics and sentiment. 

By breaking down the positions of commercial traders (who hedge against price changes) and non-commercial traders (who speculate for profit), the COT report offers insights into potential price movements and market trends.

Furthermore, the COT report allows traders to identify trends by analyzing the changes in long and short positions over time. They can also employ contrarian strategies by taking positions opposite to the prevailing market sentiment, potentially profiting from market corrections. For more guidance on developing effective trading strategies, check out this article on creating a trading plan.