The Cot report is one of the most authoritative sources of information for traders in the forex market which can not rely on an accurate measurement of the traded volume, as the forex is an OTC market (over the counter).

Through the exposures analysis we can monitor the status of the sentiment of a certain currency between the FX market operators.

www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm and it gives all details on the long / short positioning on the futures market of commercial and non-commercial. There are two versions: a long format and a short format; this last one is enough to perform in-depth analysis on the operators positioning on the market.

A sample of a short format report of Euro Fx on the Chicago Mercantile Exchange

As already mentioned, the operators on the futures market are divided between commercial (hedgers), for example the large investment banks operating in the futures market for hedging purposes, and non-commercial (Speculators). The Speculators are subject, such as hedge funds, which operate on the market for speculative purposes.

These two definitions are accompanied by the open interest one. The open interest is the number of derivatives contracts, such as futures and options, not yet closed at a specific point in time. Therefore it can be defined as the sum of all the long and short positions opened in the market in a specific moment.

Larry Williams, a great expert of Cot reports, has clearly defined how the commercials were always on the opposite side of the market trend (so very long near the primary bottoms) because of their function of covering the risks of future currency fluctuations. The chart here below shows exactly this behavior.

In 2010, while EURUSD was rising, the commercials were progressively increasing the short positions on the Euro even up to boast, from September 2010 onwards, a number of short contracts higher than the long ones. The same situation occurred in 2011 when a drop of EURUSD corresponded to an increase in the long positions in the commercials portfolios.

Commercial Euro FX Net Future Position

The non-commercials, instead, are the so-called trend-following speculators: they buy if the price rises and sell when the price falls.

In the following graph we can see clearly the tendency to increase the long positions by the speculators when the slope of the trend becomes bullish.

The GBPUSD rally in 2010 was in fact powered by a progressive increase of GBP long position, as well as the correction of 2011 was seconded by a progressive increase in short positions that exceeded the long ones in the amount already in the middle of the bearish trend.

Non-Commercial GBP Net Position (Long-Short)

Obviously, every trend has an end and the speculators realize this only after its inversion. Is it possible to take advantage of these information coming from the COT Report to our advantage? Is it possible to identify the so-called extreme situations when the positive or negative sentiment of a currency is so strong to make very likely the trend reversal? We are going to discuss this subject in the next article.