How To Trade Non Commercial CoT Data?

COT data should never be used in isolation, only as an additional layer of your overall fundamental analysis.
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Non Commercial COT Data

We just have a quick question here from Ryan asking us why traders tend to track the non-commercial positioning for COT data instead of something like the asset and institutional positions as well.

Now, first of all Ryan, thanks for the question. When we look at the COT data, the assets and institutional section is actually already included in the non-commercial positioning and it basically just comes down to the type of COT report that you’re looking at.

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So generally speaking, traders tend to use the legacy report. Now, the legacy report will basically just have two categories namely commercials and non-commercial traders. Now, we know that commercials are often producers of a particular commodity or financial institutions that just wants to reduce their risk and look to hedge against future price changes.

So think of a big corn producer, but this corn producer thinks that corn prices are actually going lower. So they want to mitigate their risk of selling their commodity at a lower price but also selling corn futures.

Now these players aren’t really worried about making a profit on those positions. If their futures contract for example loses money they will make up for it by selling their commodity at a higher price. And if the price of their commodity falls, they are hedged for that, cause then they can make money on the short contract in the futures market.

So, you can also think of this as an airline company that wants to mitigate the risk for oil prices. Let’s say they think oil prices will climb. That’ll obviously increase the cost of buying oil and they can hedge that risk by buying oil futures contracts.

So if the oil price climbs, yes, they will pay more for oil and their costs for operating will climb, but they will also make money on that and futures buying contract on the oil market. Now, then we have the non-commercials. Now these guys are just there to make a profit. They’re not there to hedge.

This will be asset managers, fund manages, head funds et cetera, that just wants to take speculative trades in order to make a profit when they expect any fluctuations in the price. They don’t have any need or want to buy any underlining commodities or currencies et cetera. They just want to make profit based on fluctuations.

Now the reasons why we focus on them is because they are the speculators and that has a lot more to lose. And they will basically jump the gun the quickest and first sign they get that the trend is changing because they can lose a lot. It’s not like the commercials that’s hedged that uses those positions as a hedge and they can actually make money from the commodity as well. These guys will lose money because it’s a purely speculative position.

Now also remember for them to be included as part of the non-commercial section, the orders and positions these traders need to have, needs to be large enough to meet the minimum reporting requirements.

So, these guys really have enough capital and enough ammunition so to speak to really move the markets and are the big players, speculative players in the market. So to the second part of your question, what about the assets and the institutional positions.

Now, those are actually already included in the non-commercial section. The difference is just in the reports. So we know that the legacy report basically just looks at commercials and non-commercials. Then you also have the disaggregated report which basically focuses on commodities, agricultural etc. Now that basically divides the commercials and non-commercials into various sections.

So you have producers and merchants versus swap-dealers, manage money and other reportables, and then you also have the traders and financial futures and that is also divided into sub-categories like dealers, asset managers, institutional players, leverage funds and other reportables.

So you can always drill down into those various sub-sections of the reports but we find it’s best and rather just prefer to look at the more aggregate data and view the non-commercials as a whole and where they have their positioning.

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