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Forex strategy "CoT Report Trading"

Commitments of Traders report is released by CFTC every Friday and contains the data on long and short futures and options positions throughout US exchanges. Among other things it includes data on the following currency pairs: USD/CAD, USD/CHF, GBP/USD, USD/JPY, EUR/USD, AUD/USD, RUB/USD, MXN/USD, BRL/USD and NZD/USD. It is believed that using the reported data on the number of "smart money" positions taken in a given pair, a Forex trader may skew winning chances in his favor.

The report contains a rather big set of quantitative characteristics based on five classes of traders:

  • Dealer / Intermediary - banks, brokers and dealers.
  • Asset Manager / Institutional - hedge funds, ETFs, big investors.
  • Leveraged Funds - private money managers.
  • Other reportables - other traders, mostly non-investors who need to hedge risks.
  • Nonreportables - everyone else.

If you want to follow some category of traders, it should definitely be either Dealers or Asset Managers as these two categories consist of the "smartest money" — the sell-side of the futures market. The most simple way would be to buy a currency pair whenever the number of Dealer long contracts rise and short contracts fall. Of course, there are numerous modifications possible based on adding some other categories into the formula or using additional market data for entries or exists.

The backtesting results of more than thirty strategies based on CoT reports have shown that most of such strategies (following Dealer trades) offer a positive edge in long-term perspective. The most consistent strategy is presented below.

Buy and Sell with Dealers/Intermediary Traders

Surprisingly, the most straight-forward interpretation of the Commitments of Traders report yields a profitable output on all of checked major currency pairs except AUD/USD, albeit with quite significant drawdowns over the course of nearly 8 years.

Features

  • Statistically proven system.
  • Only few minutes per week to dedicate.
  • Limitless potential for strategy development based on CoT reports.
  • Significant periods of drawdowns (especially following the global financial crisis of 2008).
  • "Always in the market" mode of trades.
  • Profitability levels are not that high.
  • Commitment of Traders reports releases are sometimes delayed 

How to Trade?

The rules of the this strategy are pretty simple:

  • Buy when the number of Dealer long positions rises compared to the previous report and the number of short Dealer positions falls compared to the previous report.
  • Sell when the number of Dealer long positions falls compared to the previous report and the number of short Dealer positions rises compared to the previous report.
  • If both the number of the long positions and the number of the short positions rise or fall simultaneously, then no trading signal is generated. The current position remains open.

After the first entry is executed, the strategy remains in the market during all times.

The execution of this strategy is also uncomplicated. Every CoT report has a separate field for changes in positions compared to the previous report, so there is no need to calculate anything. All 7 major currency pairs can be quickly checked and the respective entries and exits executed.

There is no stop-loss, take-profit or any additional exit conditions. Previous position is closed when a new position in the opposite direction is entered. The size of the position does not increase when a new CoT report shows an entry signal in the same direction.

 

Trading spot currencies involves substantial risk and there is always the potential for loss. Your trading results may vary. 

 

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