Commodity trading is one of the riskiest forms of speculation. Due to the fact that every trade is highly leveraged, one can make a fortune or lose their shirt in a matter of minutes. Fortunately for those who know where to look, there is a report on trader positions that reveals the positions of those traders in the know. Why would this be significant to an independent trader?
Let’s say for example that you are coffee futures trading, and that coffee futures have just dumped. You’ve been enjoying a nice methodical climb over several months, and in 1 week the floor fell out from under you. This comes as a surprise because your assessment of the long term fundamentals indicates market tightness and rising prices. But a sharp drop calls into question your assessment, and perhaps you wonder if you’ve missed an essential piece of information.
It’s well know that public news is already factored into the market. And the information that is not public is well coveted. It just so happens that there are traders who are privy to accurate, up to date information, and they trade based on that information. These traders are called commercial traders, and when talking about coffee futures trading, these players might be your Maxwell House or Folgers or something of the sort. These companies have a vested interest in the price of coffee, and you better believe they have spies in every coffee field around the world watching the crop progress.
Commodity traders, as opposed to stock traders, need to declare their positions daily. So you and I have access to the positions of these large traders, and we can see when they are long or short a market. If coffee prices collapse, and after a few weeks we see commercial buyers step in, and accumulate a net long position, we know that this decline will be short lived and they are securing physical coffee at reduced prices. This information is as good as it gets for an intermediate term to long term trade perspective.
Trader positions are reported bi monthly in the Commitment of Traders Report. Commercial traders are the insiders to follow ahead of trend changes. Large traders like hedge funds are the traders to follow during bull or bear runs. And small traders like you and me are always wrong. Ignore them. And the next time you’re looking to enter a position, check to see if the commodity insiders, the commercial traders, agree with you.