How to Make Money in the Stock Markets by Watching the Commercial Traders

You may have heard of the commercial traders, you may have even heard of the commitment of traders report or the COT. But what is it and how can we use it to make money in the stock markets?
First it might be useful to define who each of the players are in the markets.

Commercial Traders - These are the big players that have lots of money to throw around and usually these guys are the users or producers of the products that they are dealing in. So for example someone trading oil contracts might be an airline who's profits are heavily dependent on the price of fuel. A company trading in cocoa might be someone like Hersheys or Nestles who are dependent on how much they must pay for certain food products like cocoa. What these commercials have in common is that they have well funded teams of analysts researching in which direction a particular commodity is going to go in. They are considered the smart money because they have an insider's knowledge of what is going on in their particular industry.

Large speculators - These can be individual traders managing their own money, but they can also be hedge funds managing client money. It can be useful to watch these guys when they reach an extreme consensus, but they are not always trading off of inside information they way that the Commercials traders are.

Small Speculators - Are the average-joes, the retail trader, or in many cases the suckers. They say that
95 % of people will lose money in the markets, these are the guys. You might even be one of them. It often helps to bet against them when they are at an extreme. In other words when 90% or more of them are bullish it is likely that a top has been established. Likewise of 90% or more or bearish it's probably a good time to buy.

So simply put the COT report is published by the Commodities Futures Trading Commission or CFTC and it gives a weekly report of who is buying what commodity in what quantity. When the commercials are buying or shorting a product at an extreme level say 90% or more then it is good to pay attention as it makes it likelier that there will be a big move in this area.

Bear in mind that the commercial players are hedgers and will usually get in or get out of moves early or late. Also they can make money on a commodity even if they are losing money on a trade because of the fact that they are owners of the product. In other words if they are an airline and they are long on oil contracts, but oil prices fall, they may still come out ahead overall because their costs to fuel their planes is less.

So using COT data is not always a straight forward thing and often requires a bit of interpretation to be useful. It's not as simple as saying buy when the commercial traders are 90% buyers and sell when they are 10% buyers. Using a service like the Bullish Review to interpret the data is also very helpful in understanding what direction the commercials are headed.