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October 31, 2006

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First-ever
Futures Trading Summit
for active traders!

Futures Trading Summit: Nov. 15-16, 2006, Las Vegas

The Commitments of Traders Report: A Valuable Tool


Authors: Richard Ilczyszyn & Phil Streible
Learn More About Today's Author

Company: Lind-Waldock

The Commitments of Traders Report: A Valuable Tool

The Commodity Futures Trading Commission’s (CFTC) Commitments of Traders (COT) report is perhaps one of the most important trading tools available, and we think it should be included in your arsenal of weapons for battling the markets. Traders and investors use the COT report to gain insight into the thinking of the most influential market participants by examining their positions in various markets, in an attempt to predict long-term market trends. By examining extreme levels of long or short positions held by the different categories of participants, the COT data can also be used to predict possible tops/bottoms and trend reversals.

The COT report provides data broken down by three different types of traders. The CFTC currently classifies these categories of traders as commercials (commercial hedgers), non-commercials (large speculators), and non-reportables (small speculators). The CFTC releases this report every Friday at 2:30 p.m. CT, and provides a summary of each Tuesday’s open interest for those markets in which 20 or more traders hold positions equal to or greater than pre-established reporting levels.

Categories of Participants

The CFTC requires that commercial hedgers and non-commercials who are holding positions larger than the CFTC’s required reporting levels report their positions on a daily basis. With this information, the CFTC is able to create the COT report.

To be classified as a commercial hedger, one is required to register with the CFTC by showing a cash-related business for which futures are used as a hedge. For example, an individual or company owning or planning to own a cash commodity such as corn, soybeans, live cattle, coffee, etc. would be classified as a hedger. The commercial hedger is concerned that the cost of the commodity may change before they can either buy or sell it in the cash market. A commercial hedger achieves protection against changing cash prices by purchasing (or selling) futures contracts of the same or similar commodity and later offsetting that position by selling (or purchasing) futures contracts of the same quantity and type as the initial transaction.

The non-commercials are comprised of large speculators that trade above the reportable limits. These are mainly commodity funds or large independent traders, or can also be managed futures accounts.

Non-reportables are small speculators that trade below the reportable position limits. These individuals attempt to anticipate price changes and aim to profit through the buying and selling of futures contracts, without any commercial cash market interest.

A trader or trading entity can be classified differently in different markets, but generally the non-commercials or the non-reportables in a given market do not use the futures markets in connection with the production, processing, marketing or handling of the product.

Examining the Data

The CFTC assembles a list of contracts broken down into seven different market categories: currencies, energies, financials, grains, livestock, metals and softs. These categories are further broken down into specific commodities within the category. For example, grains would include corn, wheat and soybeans. The report also provides open interest, or net positions held, and the net change from the prior week for each of the three types of traders. From this data we can determine how many positions each trader is holding, whether they are positioned overall long or short, and the change from previous week. Below is a chart of what this data would look like for selected grains markets.

EXAMPLE COMMITMENT OF TRADERS REPORT – FUTURES ONLY 10/17/06

(chart)

In our opinion, the most important information in the COT report is the net position of the three categories of traders, and specifically the weekly net change from the previous report. In the net-position column, a positive number indicates a net-long position and a negative result indicates a net-short position. On the chart above, we can see the commercials are net long soybeans (14,429 contracts) and wheat (9,799 contracts), but net short corn (86,144 contracts).

The weekly net change column shows the change from the previous week’s net position, so you can track whether a category of participant has increased or decreased their long or short positions from the week before. To calculate the total open interest, you can add the total net longs together and compare them to the net-short positions for each market.   

So, what do you do with this information? And which group of traders is worth watching? We believe that the change in net position of the commercial hedgers is the most useful piece of data for traders to track. This is because the commercials are believed to have the best fundamental supply and demand information (since they have a stake in the cash market) on their specific markets, and with that information are able to position themselves as so. You may hear this group referred to as “the smart money” in discussions of the COT reports. Some traders feel they should follow the large speculators more closely, thinking that they must be good traders or they would not have the capital to remain in the large trader category. Others avoid taking the same side of the small speculator, because there is a perception that this group is under capitalized, and more likely to be on the wrong side of the market. Watch the data from week to week, and the corresponding price action in the markets—and you be the judge as to which group is worth watching most closely as you plan your own trading strategy.

In conclusion, whether you follow the commercial hedgers or the large speculators, the COT report can offer you valuable information and help you identify potential trading opportunities. You can find current and historical Commitments of Traders reports available on the internet at www.CFTC.gov . You can also receive the Commitments of Traders report through email on a weekly basis. Contact Phillip Streible at 1-800-803-8037 or Richard Ilczyszyn at 1-800-605-0095.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

Futures trading involves substantial risk of loss and may not be suitable for all investors. © 2006 Lind-Waldock® a division of Man Financial All Rights Reserved. Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL 60604.


About Today's Authors:

Richard Ilczyszyn
Years Trading: 10
Favorite Movie: WallStreet

Richard Ilczyszyn is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. From 2002 to 2004, he was a Chicago Board of Trade member, a licensed floor broker and a proprietary trader on a house account in the DJIA futures pit. He also spent five years as an institutional Treasury Bond Arb desk supervisor at the CBOT. His off-the-floor screen experience includes the DAX, Euro stocks, E-mini S&Ps and 10-Year Treasury notes.

With Lind Plus, Richard integrates technical and fundamental analysis, and his goal is to create a solid trading strategy while remaining flexible enough to capitalize on market opportunities when they arise. By identifying market trends, breakouts, and failures in a timely fashion, Richard tries to position his clients so that they have the opportunity to realize their objectives while effectively managing their risk. Up-to-the minute information and communication are key.

You can reach him at 800-605-0095 or via email at rilczyszyn@lind-waldock.com.

Phil Streible
Years Trading: 5
Favorite Movie: Trading Places

Phil Streible is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. Early in his career he began trading his own account as a screen trader focusing on the metals, grains, and stock index markets. He became a Series 7 licensed Financial Consultant with A.G. Edwards, and later expanded his trading experience as a Series 3 licensed Commodity Broker with Investment Analysis Group. In his current position as Senior Market Strategist with Lind-Waldock, all his focus is concentrated on the futures and futures options markets. His motto is: "Plan your trades and trade your plan."

Phil helps clients develop a solid trading strategy to remove some of the emotions from trading, and allow them to focus on improving their bottom line. His goal is to show clients how to anticipate, recognize, and react to bull and bear market conditions through the use of technical analysis techniques that help to define risk.

You can reach him at 800-803-8037 or via email at pstreible@lind-waldock.com.

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