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Positions for each currency are classified into 3 groups: large speculators, small speculators, and commercial traders.
If interpreted correctly, this data can be useful in forecasting price trends in the spot forex market. The COT Report reflects a condensed version of currency traders collective market votes. Interpretation of this data is definitely an art rather than a science.
The CFTC breaks open futures contracts into reportable positions and non-reportable positions. Reportable positions are further broken down into commercial and non-commercial positions. Though commercial reportable positions may be a very large portion of the open interest, the commercials activity in the futures market is an adjunct to other business activity. There may indeed be speculating in some cases, but they may also be responding to many factors such as manufacturing, purchase and sales of products, or investment overseas, or repatriation of capital or profits from abroad. Or they may be banks hedging their overseas loans or currency positions. As hedgers, they may be more concerned with futures as an insurance policy than a profit center.
While price movement is not the major concern of the commercial user, it is the life-blood of the large and small trader. It is for that reason that we analyze the activities of the speculators in detail and ignore the commercials positions.
Reportable positions are usually held by the wealthy, experienced and successful traders and/or a combination of participants. That does not mean that their every trade is a winner. However, to hold a reportable currency position is not for the faint-of-heart and requires a well-funded account and probably a friendly banker. Non-reportable positions are those of the smaller trader. Conventional wisdom says the little guy is generally on the losing side of the market. Naturally there are exceptions to all rules, but both groups are responsive to price action.
There are 3 main ways the COT report is used to forecast price trends in the spot forex market.
Terminology and Types of Traders:
CFTC COT Reports, Historical Viewable 2005 - 2013
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