Who is Trading in the Future Markets and Why It Matters - Part 2
In this November 29 Cornhusker Economics, Fabio Mattos, assistant professor in the Department of Agricultural Economics, explores how to interpret Commitments of Traders (COT) data to better understand what lies behind trader decisions.
In a previous article (Who Is Trading in the Futures Markets and Why It Matters – Part 1), we discussed the importance of learning about different types of traders in commodity markets and how we can obtain and understand the Commitments of Traders (COT) report, which provides data on traders’ positions in futures markets. Today we will discuss some approaches to interpret COT reports, trying to assess the reasoning behind trading decisions from different traders, which can reflect their price outlook and provide insights on how futures prices might change.
Once we have the COT data and see the size of long (buy) and short (sell) positions held by different types of traders, there are several ways to explore them in order to gather a better understanding of what those traders are doing in the futures market and assess what their price outlook might be. We can look at how open positions change over time, i.e. how long and short positions get larger or smaller over time. When traders start buying more in the futures market, this means that long positions will become larger (when they buy to open new long positions) and/or short positions will become smaller (when they buy to offset an existing short position). Similarly, when traders start selling more in the futures market, this means that short positions will become larger (when they sell to open new short positions) and/or long positions will become smaller (when they sell to offset an existing long position).