Why You Should Use Commitment Of Traders Data
An excellent indicator of futures contracts trends among the very largest professional traders, the Commitment of Traders report breaks down Open Interest in a way that is easy to understand— by breaking contracts down by player, and separating them into short and long positions. While useful, this information is far from a necessity for day trading; however, proper utilization of the information within the COT can warn you of any future crashes, and give you other indicators that may come in handy for future trades.
COT data gets released every week by the Community Futures Trading Commission. The data comes out on Fridays, after the market closes for the weekend; after that, it is available for download on the CTFC site. Or, if you're a user of TradeStation software, you can get the information directly on your trading platform.
The best way to create a solid indicator using COT data is to use it to find a directional shift in the commercial market, indicating that a trend will soon follow. Typically, you can use COT data to find the position of most commercial traders, then plot long positions as a positive percentage and short positions as a negative percentage of Open Interest. By seeing how the percentages shake out, you can follow patterns, which are only beginning to form.
When doing this, though, it's important not to forget that a percentage of this movement will always come from people who are hedging their bets by selling short when the market rises, and buying big when the market lowers. Commercial traders enjoy hedging until a big market trend urges them to cash in by following trending behavior before going back to hedging. If you can find the point at which hedging stops and following begins, that means the commercial market has acknowledged the current trend is at its peak.
The COT Emini data is not as clear, unfortunately, since Emini is about day trading; the COT data doesn't show any significant swinging. But by using the large S&P contract Commitment of Traders data, you'll find high-visibility indicators that will translate effectively to miniature contracts.
COT is great for keeping an eye on markets that correlate, too. As an example, crude oil and US Treasury bonds: while the bonds have a complex investment relationship, they are regarded as a sure and steady bet. On the other hand, crude oil is more volatile but can result in larger dividends; therefore, it's long been true that when investors are comfortable, they invest in crude oil, and when things feel shaky they put their money in bonds.
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There is a report called the commitment of traders, which comes from data from the markets. If you are not paying attention to this data, you may be facing a big risk. Known as the COT, this report provides important information to individuals in the market. It will show you the open interest for any traded futures contracts in both short and long positions, as well as the players who are using them. If you are in the market, this information is valuable to you.
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