How to use the CFTC COT report.

Here are some notes I've gathered from Tradestation online and John Person's book Mastering the Stock Market


CFTC COT CME Report

Players

Categories of traders in the Commitments of Traders report:

Commercials  - banks and institutions or multinational conglomerate corporations looking to hedge a cash position
Non-commercials -  hedge funds, commodity trading advisers, commodity pool operators, and locals on and off the exchange floors, or just about anyone who has a reportable size position on.
Non-reportable - the small speculators.

The theory behind the analysis of Commitments of Traders data may be simplified as “follow the smart money.” In this context, the “smart money” is generally assumed to be the non-commercials. As noted above, this includes hedge funds, Commodity Trading Advisors and professional traders whose interest in futures is strictly profit driven.Why use the COT Report

Commercials are considered savvy and their positions are worth monitoring; however, they are in the markets to hedge positions and so their futures positions are only one part of their position book. Their goal is to operate their business with net profitability and at times they are willingly on the wrong side of futures as part of the big picture of their operations.

Non-reportable is the “everyone else” category and includes the smallest traders with the least capital.

Analysis of the COT data, therefore, involves reviewing whether each of the groups is net long or short and by how much, the changes in each group’s positions from report to report and each group’s share of the total market – with particular attention paid to non-commercials and commercials.

Here are some general guidelines to follow:

• If noncommercials are net long, commercials are net long, and the nonreportable positions are net short by at least a two-to-one margin, look at buying opportunities. In other words, go with the professional speculators and the commercials. They typically know more than the average small speculator as a whole. (If noncommcials & Commericals are long, while nonreportable are short by 2:1 then consider buying)
• If noncommercials are net short, commercials are net short, and the nonreportable positions are net long by at least a two-to-one margin, look at selling opportunities.(If noncommcials & Commericals are short, while nonreportable are longby 2:1 then consider selling)
• If noncommercials are net long, commercials are net short, and the nonreportable positions are neutral, meaning not heavily net long or short, look at selling opportunities. Stick with the in-the-know smart money—the commercials. After all, not all speculative professional hedge funds are always right either.

Look at the E-mini contracts rather than the big S&P contracts. Think of the logic here: Most small speculators do not trade in the big contract. 

Here are my observations:

• Watch for a switch of positions after a long trend move.
• Wait at least three weeks of participation and accumulation of positions.
• Watch for the percentage of open interest to rise between 12 percent and 14 percent of net position.

Look at the short format combining futures and options, since traders can place a synthetic net long or short position using options. So I believe a stronger or better contrarian indicator is from taking the “temperature” of the market from the opinion from a pool of all investors with money on the line, whether it is from a futures contract or a combination of option positions.

Tradestation considers this strategy (I don't have tradestation to run the study)

Long Entry:	Close above 20-bar moving average and net non-commercial position increases (becomes more bullish) by at least 3.6% of the total non-commercial open interest.
Short Entry:	Close below 20-bar moving average and net non-commercial position decreases (becomes more bearish) by at least 3.5% of the total non-commercial open interest.
Long Exit:	Net non-commercial position decreases (becomes more bearish) by at least 2.9% of the total non-commercial open interest
Short Exit:	Net non-commercial position increases (becomes more bullish) by at least 2.6% of the total non-commercial open interest.