What do you need to do in order to place the best trades based on the data that you have available? Well, you can use the Commitment of Traders (COT) report to help make more informed decisions about where you will place your bets. It is a solid piece of information that you have available to you, and you should take full advantage of it.

Long-Term Trades

The COT report only comes out once per week, so it is best used by traders who intend to make long-term trades — like swing traders. This doesn’t mean that you completely ignore it if you trade on shorter timeframes, but it will be most useful to you when you trade with a long-term mindset.

Extreme Positions

What you are looking for with the COT report are extremely net long and extremely net short positions. You want to try to find traders who are way out on a limb one way or the other when it comes to their positioning in a trade. It is a lot easier to spot these types of trends when you are looking at a COT report and can see how people have positioned themselves within the market.

Take advantage of the way that other traders are lining up their trades, and make sure you know how others are set up in the market so you can get on the right side with them.

However, when there are too many traders who are net long or net short, they may hit a barrier on the price, and a reversal may occur. Always keep this in mind when working out how you will position your own trades to take advantage of big swings like this.

Picking Tops and Bottoms with the COT Report

It isn’t surprising to most to learn that the best time to get long or short in the market is in the moments when the market sentiment is most extreme in one direction or the other. When there are people who are pushing too strongly in one direction or another, it might be a good idea to get on the opposite side of where everyone else is.

Hedgers are the people who tend to buy at the market bottom, but speculators are known to sell at exactly that moment. Speculators get nervous and bail out at exactly that moment. Thus, it is best to follow the behavior of hedgers instead of speculators.

Using the commitment of traders (COT) report can help you do just that. When hedgers are adding to their positions as speculators are selling, you may have found the market bottom. You should give extra consideration to adding to your position at this given time.

Speculators are typically the ones who make the wrong trades because they are not equipped with all of the details and information that they make the best trades possible.

What you should know is that you are most likely going to make the most money on your trades when you get involved in the moment that the market sentiment is at its most extreme (in either direction). You should check on the market sentiment at any given time to make sure you know what the various traders are thinking about the conditions of the market at any given time. Check regularly to make sure you know where things stand at any time.

Check out the following example on the AUSUSD chart. On this chart, you can see the COT net positions of dollar speculators on the bottom:

  • Commercial traders (green)
  • Large speculators (red)
  • Small speculators (blue)

By tracking what the large speculators are doing, traders can find precursors to reversals in the market.

Be Prepared to Hold the Line

The COT can give you an indication of where traders are positioned at the moment, but this doesn’t mean that there won’t be bobbles and fluctuations in the market along the way. In fact, you should be prepared to deal with a lot of the bouncing around that occurs in the market all the time. You need to be steadfast in your position and make sure you don’t give in to the temporary movements that are bound to occur.

Use the COT report as your guiding light to stay the course no matter how bumpy the road ahead is. You need to have conviction in your trades, and that means noticing what the COT report says and how you can use it to your own advantage.