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Commitments Of Traders Report. What It Is And Why It's So Important For Retail Traders?

|Includes: SPDR S&P 500 Trust ETF (SPY)

Majority of traders are losing their money because they enter a trade when it's too late

Best way to spot a market correction is by using COT reports in the way professionals are using it

Trading ideas are found not in the charts but using technical analysis, fundamentals and sentiment combined.

The Commitments of Traders is a weekly report issued by the Commodity Futures Trading Commission enumerating the holdings of participants in various futures markets. The Commodity Futures Trading Commission (CFTC) releases a new report every Friday at 3:30 Eastern Time, and the report reflects the commitments of traders on the prior Tuesday. Many speculative traders use the Commitments of Traders report to help them decide whether or not to take a long or short position. One theory is that "small speculators" are generally wrong and that the best option is to trade against the direction of non reportable traders.

 Why COT is important for retail traders?

 Maybe you have heard about 90/90/90 rule. It says that 90% of retail traders lose 90% of their capital in first 90 days of their trading path. It is sad, but it is true. Why it happens? The answer is very simple.

It happens because of 3things:

  1. Retail traders are going against the market. Sometimes even without knowing it.
  2. Retail traders are taking big risks by using leverage and scalping for small profits. (Majority of scalpers are not profitable in the long run).
  3. Most Retail traders are not good enough in trade management and don't have patience. They close their profitable trades fast and keep their losing trades hoping to end up in profit. (Psychology).

I will be more elaborate on the second and third issues in my future articles, now let’s continue with the first one:

"The Market Is Always Right" and the market moves because of money flowing from one financial asset to another. Big money. I mean billions and billions of dollars. The only way for us (retail traders) to earn consistent profits is to go with the Big Sharks. Not against them. How can we know what big funds and investment banks are doing? FROM COT REPORT!! Their NET long and short positions are in there.

All we need to do is to spend some time analysing this data.

 I recommend spending a few hours every weekend on this data to make sure we are not trading against the market. Based on my prior analysis of the COT Excel Sheet, there are only six columns really worth looking at:

Non Commercial Positions Long All (Leveraged Money Long All)

Non Commercial Positions Short All (Leveraged Money Short All)

Change in Non Commercial Positions Long All (Change in Leveraged Money Long All)

Change in Non Commercial Positions Short All (Change in Leveraged Money Short All)

Pct of Open Interest Non Commercial Long ALL (Pct of Open Interest Leveraged Money Long ALL)

Pct of Open Interest Non Commercial Short ALL (Pct of Open Interest Leveraged Money Short ALL)

Why we care only about activity of Non Commercial participants? Because they are the biggest speculators. It is Hedge Funds and Investment Banks. Commercial participants are not so important because it is manufacturers, importers and exporters. They are mostly hedging their risks. Biggest market movers are speculators and Investment firms. In these columns we can find what exactly biggest funds are doing with a particular financial instrument. (Currency Contracts in our case).

 Second step is to create a new column and calculate what we call "The Flip". "The Flip" is a NET position of the market for a particular financial instrument. Formula for calculation is:

FLIP = Pct of Open Interest Non Commercial Long ALL - (minus) Pct of Open Interest Non Commercial Short ALL.

If the value of "The Flip" is positive it means that the market is NET Long, if negative the market is NET Short.

But remember, if "The Flip" value reaches extreme highs or lows (60, -60 or more) it can be a very strong signal to wait for a reversal in trend.

 You can see that COT data can provide us with very useful information. It is important for us to learn to understand these reports properly and I believe that incorporating COT to your market analysis can have a huge benefits to your trading results.

Real world investment idea.

Ok, enough talking. Let's look in to this week's COT report. I see a possible investment idea in S&P 500 hundred index.

In picture below we see that FLIP turned positive a few weeks ago and now it's value is 4.6. It means that market participants turns bullish. This can be a perfect time to buy SP500 index.

S&P 500 Flip values from the beginning of 2017 till now As we can see market sentiment is far away from extremes and bulls have a lot of room to go from here.

Idea is to buy (SPY) now and enjoy the ride to further highs.

Don't forget to always check weekly COT reports and other fundamental news. More about sentiment and fundamental analysis in other articles


Thank you for reading this article, I hope you have learned something new.

  Happy Trading!

Disclosure: I am/we are long SPY.