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Once you know how to read the report, you can use the Commitments as a potential proxy for the more common retail market.
A Breakdown on the Commitment of Traders Report
The Commitment of Traders or CoT report is a weekly report that shows how very large traders are positioned. Because FX is not traded on a centralized exchange like the stocks are in the NYSE in the US, this information from the CFTC is even more valuable.
Furthermore, this data is from the Chicago Mecantile Exchange (CME) / International Money Market (IMM) where only the larger speculators noted as Non-Commercial (think Bank Trading Desks) and business hedgers noted as Commercial (think Toyota or Coke-Cola) are setting up positions.
Commercial positions are seen as hedgers and have a business interest in the currency due to existing business contracts with exposure in that specific currency. They often are taking positions solely to limit risk / exposure and not to speculate like Non-Commercials. Non-Commercials are speculators like you and I, who are in the market to make a profit while limiting risk on any positions based on our own trading strategy.
Non-Commercials are specifically labeled by the CFTC as, "typically hedge funds and various types of money managers, including registered commodity trading advisors (CTAs); registered commodity pool operators (CPOs) or unregistered funds identified by CFTC.”
What Does The Report Say?
The report lists out a few bits of common knowledge followed by week-to-week specifics on positioning or commitments.
First, the repert will cover common contracts / lot sizes on the CME for any given currency. For example, the report reads:
GBP: Contract Size £62,500
JPY: Contract Size ¥12.5mn
While traders on the IMM are taking positions long or short JPY, you should read them as USDJPY where as USD is the other currency.
Next You will see the number of current long and short commitments and the change in the respective category from last week. This can be seen on the attached photo of the recent report.
When Does It Come Out & How Can I Get It? ?
The report comes out every Friday at 3:30pm ET. You can access the recent report here from the CFTC.
How Do FX Traders Use the CoT Report?
This is the sweet spot of the report that can help you see how large traders ,with likely better information than you or I have, are positioned and if our conviction aligns, we can take a similar position as long as our risk is managed. Basically, we want to see if there is a trend of buying or selling in one specific currency pair.
In late August '14, we've seen a recent trend of USD buying nearly across the board as fundamental data begins to tic higher and the Fed begins to wrestle with when to raise rates. This trend of USD-Buying has co-existed with a buildup of EUR short positions with the current tally of EUR shorts at the largest since Aug 2012.
This trend has been confirmed on the charts as EURUSD has dropped from 1.3992 on May 8, 2014 to below 1.3200 in late August. However, there is no free lunch and markets reverse. In August 2012, a similar trend was developing with massive USD buying but when the large traders were no longer in favor of the Short EUR positions, sentiment flipped and massive Eur buying began. This caused EUR to rally from 1.2350 to 1.3700.
The CoT report can help you see where conviction lies between the largest and most informed traders. If your technical analysis confirms what the largest traders in the world are doing, then it may be a valid trade as long as your risk is limited with a stop loss.