Konstantin Boykachev

CEO Proforexea LLC

Honest Coder

Professional Trader

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Konstantin Boykachev

CEO Proforexea LLC

Honest Coder

Professional Trader

Blog Post

How to analyze the actions of market makers and hedgers in Forex using the COT report

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Forex is divided into two parts – exchange and over-the-counter. OTC Forex is decentralized, therefore, it is impossible to determine the trading volumes on it and the real statistics on the actions of market makers (although the depth of market creates some illusion of volumes). But it is the market makers, which include institutional investors and hedgers, who influence the price, violating the algorithms of technical analysis. Analyzing the trading volumes of large players could provide traders with many ideas. For example, at what moments large capital is activated, in which direction traders and hedgers are placed, for which instruments. Such a report could become another tool for analyzing the medium and long term trend. And an example of such analytics is the COT report.

COT reports (Commitments of Trader)

On the exchange market, foreign exchange instruments in most cases are represented by futures, which allow you to stretch the purchase / sale of an asset over time and insure risks. Insurance consists in hedging – opening deals in the opposite direction, that is, putting a lock. Below will be considered a specific example to explain the purpose of hedging.

The exchange turnover is controlled by the regulator, whose task is to control transactions, prevent gross violations, manipulations and money laundering. One of the largest regulators monitoring the exchange currency market is the CFTC (USA). The commission accumulates data on transactions, brings them into different classes / groups and publishes special COT reports (Commitments of Trader). You can find them on the CFTC website in the main menu under “Market reports” / CME / Long Format. The design of the regulator’s website changes from time to time, so ask Google for “Commitments of Trader CFTC”.

SOT-1

The document is summary, so you will have to scroll through it to the desired ticket (faster to ask it by search). Futures contracts are denominated in USD USA. Therefore, the dynamics of the rate for reverse quotes such as EUR / USD will coincide with the direction of the currency pair. According to direct quotes, the movement of futures will be mirror-like corresponding to the currency pairs. And the second point: despite the fact that the COT report is the most complete for the foreign exchange market, the statistics on “exotic” (Russian ruble, Brazilian or Mexican currency) may not correspond to reality. These currencies are not liquid and the regulator does not have full statistics.

Explanation of the articles in the report:

  • Open Interest – the total number of active futures of a certain currency pair for all accumulated data (platforms).
  • Reportable Positions – data on the largest deals. This includes the positions of the largest players, whose turnover is higher than a fixed value.
  • Nonreportable Positions – deals of other “small” traders.
  • Non-Commercial – transcript of the Reportable Positions section.
  • Commercial – hedger deals, that is, reverse deals.
  • Total – all positions.
  • Spreading – deals opened in different directions by one trader (locking).
  • Long / Short – buy and sell deals.

Analysis of the COT report makes it possible to assess the ratio of transactions of large investors and hedgers on the exchange currency market in the context of several pairs. A handy tool with several drawbacks. First, data should only be viewed over time. The second point is to process it manually, transferring data from the COT report to the editors, a dubious pleasure.

The second problem was solved by third-party analytical resources. For example, Finviz.

SOT-2

There are no hedger positions here, but there are volumes in terms of long and short positions.

Another point to consider is the data collection period of the COT report. Information is published every Friday, but closed Tuesday. The resulting shift can distort the statistics, so it makes sense to analyze the report on weekly and monthly intervals.

The “dark horse” in the COT report is hedgers. There is a misconception that reverse positions of hedgers can be interpreted as a forecast of the future dynamics of a currency pair. This is not the case because large futures investors often stand in reverse positions, but this does not mean a reversal.

  • Hedge example. A large investor is going to enter New Zealand, who will develop the network of the retail segment. To start, he needs to buy a large amount of local currency to launch the network, that is, in fact, open a long position on the qiwi. But launching a network is a long process. Hiring workers, concluding contracts, resolving lease issues – during this time, the New Zealand dollar rate may change. The investor does not aim to make money on currency speculation, but at the same time he cannot do without the local currency. Together with a long position, he opens the same trade to sell futures with an expiration date by the time the business starts. He only loses the spread, but is insured against sharp fluctuations in one direction or another. A private trader sees the volumes of both a long position and a hedge, but the presence of a hedge does not mean that the long position is removed, and the price will go down. In other words, the presence of transactions in both directions does not indicate where the price will go next.

The positions of hedgers in the COT report can create the illusion of a reversal, therefore, this data is not published in some summary reports. In order not to be confused.

How to use COT reports:

  • Search for overbought and oversold zones on a long-term trend. The volumes of transactions of large investors are analyzed, the directions of quotations for futures and corresponding currency pairs are compared.
  • Comparison of the volumes of large investors and small traders (search for chart divergence).

We hope that acquaintance with another new tool interested you and you can find a use for it!

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