BASIC TECHNIQUES
Use Them In Your Trading Plan
Watch The Commercials
by Sam Bhugaloo
The Commitments Of Traders report has long been used among futures traders. Here's why you should follow the commercials and how you can incorporate the information into your trading plan.An important feature of the futures markets is the relationship between hedgers and speculators. Commercial traders are hedgers in the futures markets, while speculators are noncommercial traders. The Commodity Futures Trading Commission (CFTC), the government regulatory authority for the industry, registers all futures contracts. The cost for registering is higher for speculators than for hedgers. Thus, those traders who are producing or processing large amounts of commodities register as commercial traders. All other traders are either large noncommercials with many contracts traded at a time or traders with only a few contracts.
If used correctly, the Commitments Of Traders (COT) report is a powerful tool that will allow traders to predict potential bullish trends or market tops by examining extreme levels of bullishness or bearishness. Many traders follow the large speculators, but this may not produce the expected results. Here's why you should follow the COT commercials and incorporate this into your trading plan.
WHAT IS THE COT REPORT?
The CFTC assembles a list of the contracts registered every day by each trader category in about 75 markets and publishes them every week at its website. This list, the Commitments Of Traders (COT) report, includes the open interest data for commercial buyers and sellers, large noncommercial buyers and sellers, and small buyers and sellers. From these reports, it is possible to see how many contracts the commercial buyers and sellers are holding-that is, the big guys or our trend-follower. The COT reports provide a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels set up by the CFTC. Every Friday at 15:30 pm Eastern time, the CFTC releases the reports. The three market participants are:
Commercial hedgers -- Institutions and individuals who manage the cash side of the business in the underlying commodity, like farmers, miners, international businesses and processors. Commercials are free from position limits.Noncommercials (large speculators) -- This is typically a large floor trader, a managed futures account, or a small hedge fund. In general, these types of traders are technically trend-followers. Since the large speculators are consistent trend-followers and usually overdo it at extremes, we want to follow their movements with caution.
Small speculators -- This includes all speculators with positions below reportable limits and small hedgers.
...Continued in the October issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the October 2006 issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
Return to October 2006 Contents