Anyone who wants to be involved in the currency market needs to understand how to find certain sources of information that they wouldn’t necessarily be all that concerned about in other situations. However, at the end of the day, we all need to make sure we are well informed and understand what is happening in the various assets that we are attempting to trade.

The Commitment of Traders (COT) report is a great resource to look at because it will given an indication about where the following groups of traders are positioned in any given market:

  • Commercial players (hedgers)
  • Non-commercial players (large speculators)
  • Retail players (small speculators)

It is best to know where all of these groups stand on the trade because you need to know which actions you should take to either get in line with where they are, or take a position that is opposite theirs.

Pay Close Attention to the Commercial Traders

You should pay particular attention to the commercial traders who are involved in the market. They are the people who are most likely to have the inside scoop as far as what to trade and why. They are not merely speculating or going off of extremely limited information. Instead, they know what it takes to manage their trades, and they likely have the inside scoop on where the market may be headed next. Besides that, they are putting the largest amounts of money to work in the market, so you can be sure that they are not willing to take a chance on a wild hunch.

These traders tend to be most bullish at market bottoms, and most bearish at market tops. If you pay attention to how they are trading the market, you might be able to key in on the kind of changes that they have made to their positions to make them more in line with where the market is actually headed. You may decide to get yourself in line with their position as well.

Large Speculators

These are traders who have no interest in actually holding the asset that they are purchasing or selling. Instead, they are simply trying to ride the market for all that it is worth. Thus, you will want to monitor their trading activity as well to see where they place their bets. They can also be reasonably good indicators of where the market is truly headed.

Small Speculators

These accounts are typically on the wrong side of the trade. They are the everyday people, and they simply don’t have the slightest clue as to where the market is likely headed. Thus, the actions that they take can be thought of as anti-trend. That is to say that you can ignore the moves that they make or even trade opposite of them because they are probably on the wrong side of the trade anyway.