With so many trading tools on the market, it’s very easy to become confused at to what to use. Traders are always talking about indicators like Moving Averages, the RSI, and Stochastics. There are literally thousands of indicators and variations available, and most trading software these days give you the ability to make your own indicators out of the price data provided.

While this may seem like an immense amount of power, a significant problem exists. All of these indicators that are created are derived from the same price information that everyone else has. All price data has the same information in it, particularly information about the opening price, the high price, the low price, and the closing price of a bar. You can also know the volume of trading that occurred on that bar. The bar may represent daily, weekly, or 5-minutes of trading. The problem is that there’s only so much information that you can get from a group of bars. All of these indicators that have been made try and extract new information from the same information that everyone else has, and there just isn’t that much that can be derived.

In futures trading and options trading, there is also open interest. This information is very useful, and it’s more information than before. Most people have never studied open interest analysis, so it still has an air of mystery around it.

Specifically for futures and Forex trading, there is another tool that is overlooked by more than 99% of the traders out there. In fact, more than 99% of the traders in these markets have never even heard of this tool. It’s called the “Commitments of Traders” report (COT). Each week, the Commodity Futures Trading Commission (http://www.cftc.gov) collects information from the exchanges about what groups of traders are holding what positions. The groups are broken down into 3 categories: Commercial Traders, Non-Commercial Traders (Large Speculators), and Small Traders (Small Speculators).

The Commercial Traders are the ones who buy and sell the actual products, like corn, wheat, gold, or foreign currency. More specifically, they have a product to “hedge” in that market. The Non-Commercial Traders are typically managed accounts of some kind (like a hedge fund) that are trying to make profits off of the changes in the futures price. The Small Traders represent everyone else. This is where individual traders fit in.

The report itself can be difficult to read for an untrained eye, but the information can be priceless. By looking at what each group is holding, you can see who has new information in their possession, who is adding to their positions, and who doesn’t have a clue.

You also may want to consider signing up with a COT Data Service like Shatterfield (http://www.shatterfield.com). For a small monthly fee, they provide the data in a format that most charting software packages can use, and it allows the COT to be displayed, processed, and even have trading systems made out of it. They even have a great deal of free training on using the data from the Commitments of Traders report.

Going back to the original subject, the most valuable thing about the Commitments of Traders data is that it’s actually “new” information. No indicators of price data can uncover the information that the COT report provides, and nothing in the COT report can derive price data. Therefore, you’re not just working with another indicator of the same limited information that has always been worked with.

The best part is that it’s insider information that’s collected by the government and it’s legal to use. It allows you to be the ultimate market parasite! Because it deals with currency futures as well, it is a great analysis tool for Forex traders, even if there’s not necessarily a 1 to 1 relationship. Many currency traders are using this to give then an edge in their Forex trading.

Whether you get it from the government directly or from a data service, it certainly is something that should not be overlooked.


About The Author:


Roger Damon is a consultant for the Trading Systems Analysis Group (http://www.tsagroup.com), a trading systems design and development company.