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How to Use Commitments of Traders Report (COT) in Forex Trading

Although Commitments of Traders Report (COT) is not economic indicator, many professional forex traders have been using it as an important tool in forex trading. What is Commitments of Traders Report (COT)? How can be COT used in forex trading?

Commitments of Traders Report (COT) is a weekly report published by the Commodity futures Trading Commission (CFTC) of USA. It lists current contract commitments by 3 groups of futures market participants: Commercial, Non-commercial, and Non-reportable. Issued on Friday, the COT report provides a “breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC” (CFTC).

The COT report covers many futures and options. But for forex trading, we only need to focus on the currency futures and options. But how can the data of currency futures and options be used for spot forex trading?

Well, we all know that no volume data is available in spot forex trading, as there is no centralized exchange to gather the data. To compensate for this notable drawback, professional forex traders have used Commitments of Traders Report (COT) as a substitute for estimating forex trade positioning and fprice trends.

When using the COT report, pay particular attention to the Non-commercial data. Opening interest of the Non-commercial group reflects better forex traders' positions in a currency market than Non-commercial and Non-reportablegroups.

The COT report can be used to predict price reversals in forex market. If the long open interests predominate over the short open interests for the Non-commercial group, or both the Commercial and Non-commercial groups are preponderantly buyers of a currency future, then a downward price reversal in the forex market is very likely as the long positions become exhausted. Alternatively, if the COT report shows exceptionally large net short positions in a currency future for the Non-commercial group, prices of that currency in forex spot market very often reverse upward.

Another method to use the COT report to predict price reversals is by observing the shift between net long open interests and net short open interests. When a shift from the net long positions to net short positions occurs for the Non-commercial group, prices tend to move down, or vice versa.

Meanwhile, forex traders have used the COT report to gauge trend strength. This is done by analyzing the increase or decrease of the open interest. If a currency is in an uptrend, and the COT report shows an increase in open interests of the currency's futures, then the trend is generally strong. Otherwise, the trend is weak.

In summary, the COT report can be a very helpful tool for forex traders. It can be used to predict forex price reversals as well as evaluate the trend strength of a forex price movement.

Click here to read the COT report on the CFTC website

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