COT Report: Reading Smart Money Positioning
The Commitment of Traders (COT) report reveals how institutional traders (commercials, hedge funds, asset managers) are positioned in futures markets. It's published weekly by the CFTC and provides a window into smart money thinking.
Who's in the Report
Commercials
Corporations hedging real business exposure. Often contrarian—they buy when prices are low, sell when high.
Large Speculators
Hedge funds and CTAs. Trend-followers who amplify moves. Extreme positioning often signals reversals.
Small Speculators
Retail traders. Often wrong at extremes—useful as a contrarian indicator.
How to Use COT Data
Extreme Positioning = Reversal Risk
When large speculators are extremely net long (or short) a currency, it signals crowded positioning. If sentiment shifts, mass exits create violent reversals. Example: If hedge funds are record net long EUR, a dovish ECB surprise triggers mass EUR selling.
Commercial Positioning as Confirmation
If commercials are buying USD aggressively while speculators sell, commercials are often right. They have better fundamental insights.
Where to Find COT Data
• CFTC Website: Official source, published Fridays (data through Tuesday)
• COT Index tools: Websites that calculate positioning extremes automatically
• TradingView: COT indicators available for major currency futures
Sentiment Indicators & Contrarian Signals
When everyone believes the same thing, the move is usually over. Sentiment indicators help identify extreme positioning before reversals occur.
Retail Sentiment (IG Client Sentiment)
Many brokers publish retail trader positioning. Retail traders are notoriously wrong at extremes.
• 80%+ retail long → Contrarian short signal
• 80%+ retail short → Contrarian long signal
• Works best at major turning points
Option Skew
Measures demand for protective puts vs calls. Extreme skew signals fear or complacency.
• High put skew: Hedging demand (bearish extreme)
• Low skew: Complacency (bullish extreme)
• Contrarian at extremes
Analyst Forecasts
When all major banks forecast the same currency direction, it's often priced in.
• Unanimous bullish forecasts → Potential top
• Unanimous bearish forecasts → Potential bottom
• Consensus is usually wrong
Put/Call Ratio
Ratio of put options to call options traded. Measures fear vs greed.
• High ratio: Excessive fear (contrarian buy)
• Low ratio: Excessive greed (contrarian sell)
• Mean reversion indicator
Using Sentiment in Your Framework
Sentiment indicators work best as confirmation, not primary signals. When fundamentals support a move AND sentiment is not yet extreme, that's the sweet spot. When fundamentals support a move BUT sentiment is at extremes, wait for a pullback. When fundamentals conflict with extreme sentiment, sentiment often wins short-term but fundamentals win medium-term.