Since the foreign exchange market is an over the counter market, forex traders have a difficult time understanding how much currency is trading hands, and who is doing the trading. Of course, we know that buying and selling is important from a fundamental and technical view, so we have to get to the bottom of who’s doing the market moving.
While retail traders largely trade on the spot forex markets, the people with the big money—investment banks, mutual fund managers, central banks, and others—buy and sell currency futures. That means that they trade on a regulated market, one where everyone has to “show their cards,” so to speak.
Showing their Cards in the COT
The Commodities Futures Trading Commission, which regulates the futures market for foreign exchange, requires that big traders report their positions every week. The CTFC then collects this data to put it together, thus making the Commitment of Traders report.
Aha!
Commitment. Of. Traders.
This makes perfect sense—the Commitment of Traders shows how committed forex traders are to a specific trade. If we can know which traders are buying and selling, we can know how the forex market might move in the future. And in knowing where it might move in the future, we make money by placing short and long positions. Brilliant.
What the COT Report Tells Us
The Commitment of Traders report works as an excellent substitute for volume (how much of each currency is bought and sold in a given period of time), and also how bullish or bearish certain types of traders are in the market.
In the next section, we’ll explain the three different types of traders, and fill you in on which you should watch, and which ones you shouldn’t. Knowing is half the battle with the COT!
