COT Index

The word ‘Index’ is used throughout our COT dashboard and understanding fully what this represents will help you unlock the information contained within the Commitments of traders.
 
The traditional ‘COT Index’ that you may have read about online or in books refers to an index calculated using the last 3 years commercial net positions data, which here at MMC we call the ‘36 month commercial index’.
 
Here, however, we go much further, we don’t restrict our analysis to just the commercial traders or to just one set time frame/look back (i.e. 3 years), we analyse every figure that is released each week by the CFTC and also provide traders with multiple reference time frames/look backs to give you long, intermediate and short term guidance. This is why we offer the most comprehensive COT analysis tool online today.
 

What is a COT Index?

A COT index put simply, is a method used to quickly quantify the actions of a group of traders. In the case of the commercials, the COT index allows us to put into perspective the weekly positions of commercial traders, so that we have a consistent reference point by which to judge their actions.

By doing this we can determine very quickly how their current level of buying and selling compares to any previous time in the past 3 years (as is the case in a traditional COT index) or additionally over the last 18 or 6 months. By knowing this we can look to replicate the conditions in which any market previously rallied or declined, as a rally or decline will more often than not, be the result of commercial buying or selling.
 
An index will range in value from 0 – 100%, and will therefore give us the percentage of bullishness each group of traders are in a particular market, with a reading of 100% indicating they are at their most bullish in the last 3 years, and a reading of 0% indicating they are at their least bullish (bearish) in the last 3 years.
 
Let’s take a look at this in practice by going through how we turn the positions data into an index. Using the last 3 years of Commercial Net positions data (blue line) for the US Dollar index, we can see commercial traders have a current Net position of -71260, meaning they are short (selling) 71260 more contracts than they are long (buying). Straight away we know that they aren’t very bullish as they are selling more than they are buying, but is this level of selling enough to make the market decline and therefore make us want to look to sell as well?

That is where the COT index comes into play. By analysing all the data for the last 3 years we can establish, using the formula below, a current COT index value of 26% (green line) meaning that while commercial traders are currently not bullish USD, they have been more bearish i.e. when the index was last at 0%, and we should therefore not be expecting a decline in the near future.  

What drives a COT Index? 

As we have already said,  an index is calculated using the Net positions but it is important to remember the net positions are made up of two parts, both long positions and short positions. If the net positions value increases this will cause its associated Index to increase also. An increase in net positions can however be caused by two conditions, an increase in long positions but also by a decrease in short positions. The reverse is also true for a decrease in net positions.
 
Let’s consider a long position reading of 100,000 and a short position reading of 50,000. The net positions reading will be 50,000 (long – short). If the following week the long positions increase by 10,000 to 110,000 and the short positions remains at 50,000 then the net position value will increase to 60,000. However if the long positions remained the same at 100,000 but the short positions reduced by 10,000 to 40,000 then this would also cause the net positions to increase to 60,000.
 
It’s important to remember this as these conditions are very different, an increase in net positions caused by increasing long positions make for more bullish conditions for a market to rally than simply a decrease in short positions. 
 

Using the COT index.

 
If you are new to COT data simply start by using the default information presented with each market within our dashboard. When you open a new graph while in COT Charts, you will see a candlestick chart indicating the price movement for that market for the past 4 years and below this by default there will be a ‘36m Comm Index’ indicating the buying and selling activities of commercial traders, which has in turn produced the movements in price we can see.
 
Start by looking at how that market has reacted each time the index line reached 100% and also 0%. Remember COT data is not an ‘indicator’ and an index reaching 100 or 0% does not represent a buying or selling signal. It does however indicate the current conditions within that market which could result in major market rallies or declines.