HOW TO READ THE COT REPORT
Learn How to use the Commitments of Traders (COT) Report
– second part –
Introduction: In this article, you will continue learning how to read the excel version of the COT Report
COT Data & COT Report
In the last published article, How To Read the COT Reports – Part I, I have explained some general info about the simplified excel version of Commitments of Traders (COT) Reports. Now, I have decided to go further and give more details about these reports.
If you didn’t read the first part, please go there now and read it before continuing here.
This article is divided into two parts:
- What is the meaning of the colors used in the COT Reports?
- The correlation between COT Reports & Candlestick Charts
1. Understanding the colors
In my opinion, it is a good idea to use colors and have a visual representation of the COT data. So, this is why I am using colored bars and colored columns in the reports. This way, you can easily spot potential changes in the market trends.
Now, let’s take the Swiss Franc (COT) report and use it as an example. Then, in the following lines, I will explain what is the meaning of all the colors used in the reports.
As a brief clarification, all the reports show the currency versus the U.S. Dollar, so it means that the COT report used in the example above refers to CHF/USD.
Looking at the Swiss Franc COT report, especially at the Net Positions column, we see how the trend changed over time. At the same time, we can also see the current market sentiment because it is easy to spot the changes in recent weeks.
Regarding the colors, it’s like watching a classic candlestick chart, green is for bullish, and red is for bearish.
Next, we will go thru each colored column, so you can better understand how the colors are used.
Let’s start with the first two columns, longs, and shorts…
Longs and Shorts
First, the “Longs” and “Shorts” columns are always colored green or red. To be more precise, the longs are represented in green, and the shorts are represented in red. The association is simple, as in a candlestick chart where green means bullish (long) and red means bearish (short).
Second, when checking the “LONGS” and “SHORTS” columns, the numbers of longs and shorts are illustrated with a bar. Bar length represents the number of opened positions for longs and shorts.
In conclusion, the more “longs” opened, the longer the green-colored bar is. Or, the more “shorts” opened, the longer the red-colored bar is.
Personally, I like using the bars for a comparison between the current number of longs/shorts vs past reports longs/shorts. I am not comparing the number of longs with the number of shorts. We have a “Net Position” column for this.
When many longs are opened, we are using the green color. Why? Because the more longs are open, the more bullish the market is. Of course, we also want to see more shorts closed to confirm the bullish move.
When many longs are closed, we are using the red color. Why? Because the more longs are closed, the more chances to see a bearish move in the market. Of course, column “Change Shorts” should be colored red too, so it can confirm a bearish move.
When many shorts are opened, we are using the red color. Why? Because the more shorts are open, the more bearish the market is. Again, you should check the “Change Longs” also, to confirm the bearish move.
When many shorts are closed, we are using the green color. Why? Because the more shorts are closed, the more bullish the market is. And as I said before, we need a confirmation from column “Change Longs” to have a bullish perspective. It has to be green too, for a bullish move perspective.
In conclusion, when both columns “Change Longs” and “Change Shorts” have the same color, it means that the bullish or bearish sentiment in the market is a strong one. It shows the imbalance between longs and shorts and a possible strong movement in the direction shown by the color (green for bullish or red for bearish).
This column represents the difference between the longs and the shorts. We are using green and red colors for the situation when the ratio between longs and shorts has changed.
Keep in mind that we are referring to currency’s evolution from the past, we are not referring to value “0” (zero).
So, red does not necessarily mean that “Net Positions” have a negative value or green does not mean that it has a positive value.
It means that it is bearish or bullish compared to the trend of that market. So, the colors are related to the market trend, not to zero.
Even if “Net Positions” shows +20k longs it will be red if the “Net Positions” value is coming from +50k longs. That’s because it is a significant drop from +50k to +20k.
It is an easy concept, I’m sure you understand it. Use the reports at your own risk! I am not responsible for any loss. Please read the Risk Warning and Disclaimer.
Happy trading! 🙂
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