In this section we will show you how to use the Commitment of Traders (COT) reports to accomplish this goal as we will skillfully explain how to break down the COT data into producers, consumers, and funds so you understand the positions and activities of these key market participants. In addition, you will be able to detect position imbalances that could be harbingers of major trend changes.

By analyzing the data provided by the COT report, traders can see the market participants prepared or positioned themselves ahead of significant market turning points and in front of extensive bull and bear markets.
While the Commitment of Traders tracks the positions (longs and shorts) held by all market participants, my analysis further breaks down this data and applies proprietary statistical measurements and indicators to identify trading opportunities.  We combine these indicators with proprietary price indicators and graphically present the results to you.

Breaking the COT down to its elements, we see that there are three key market participant categories:
 
1) “Com” -- large commercial positions (producers & consumer hedgers)
2) “NC” -- large non-commercial positions (commodity investment funds)
3) “SM”-- non-reportable positions (small speculators and small hedgers)

Each category represents a particular group of participants.  The Com category represents the commercial hedgers which are considered the most knowledgeable in each market, because their very livelihood depends on getting it right with respect to future prices. These two groups of commercial participants have different reasons for being in the market; however, both share the same goal, which is to reduce their risk in the cash market.  For the producer, this may mean locking in a particular price using futures contracts to reduce the risk of being forced to sell their “produce” at lower prices in the cash market.  A commercial consumer on the other hand, is concerned about the possibility of rising raw commodity prices.  They will also use the futures markets to control or contain this risk. 

Here’s a chart example:

This is an example chart of the US Dollar index. In the upper part of the chart we have the price action of the USD index futures with each bar representing weekly data. At the bottom of the chart there is data on the net long/short positions broken down into three categories:
• Commercial (Blue)
• Large Non-commercial (Green)
• Small Non-commercial (Red)
 We will pay attention to the Large Non-commercial positions since commercial positions are for hedging and small retail traders aren’t really a factor.
There is the US Dollar began with a little bull run at the start of 2005. As the value of the net long positions of large speculative traders (green line) rose, and so did the price of the USD futures index. In the first week of July 2005, net long positions grew to over 20K contracts. This was an area of longs. The USD index price dropped from 91 to 86, but it only proved to be a retrenchment as the index rallied to a new high of about 93.16 and higher level of 29K net long contracts.
Now you can see the number of long USD index futures contracts decline and a drop in the index price from 93 all the way down to about 84. In which you would gain a lot of profits if you had put a position there

Here’s a weekly chart of EUR/USD:

By applying the previous section by positioning ourselves for market reversals, there are t two significant moves from July 2005 to May 2006 in EUR/USD.

First, in July 2005, the extreme levels of net longs in the USD index futures would enable you to catch the possible upcoming sell off of the Greenback by buying EUR/USD. and you will make a profit maximum of 700 pips. In November 2005, the extreme level of long USD index futures contracts, buying EUR/USD would have been the best bet as the pair rallied from about 1.1650 to 1.3000!!! That’s over 1300 pips gained! So, from July 2005 to May 2006, you can gain almost 2000 pips just using the COT report as a market reversal indicator.