One of the most profitable trading strategies has always been to follow the crowd, and mimic the positions of top investors. However, it is often not easy for small traders to have the information summarizing what big investors are doing. The COT report (Committments of Traders) certainly provides a very useful tool for obtaining this information.
Published every Friday by the Chicago Mercantile Exchange (CME), the COT report reports all long and short positions, in absolute terms and weekly change, and the spread, for different categories of investors. For the euro, these categories are: dealers, asset managers, leveraged funds (including hedge funds), other reportables and nonreportables. Dealers and asset managers represent investors who have a medium-long term investment strategy (strategic investors), while leveraged funds are those who have a short-term strategy (tactical investors).
From the analysis of the increase or decrease of long and short positions, it is possible to understand how investors are positioning themselves on the euro-dollar, or if they bet on an appreciation, rather than on a depreciation of the single currency against the greenback .
Example 1: a strong increase in long positions by leveraged funds, accompanied by a sharp reduction in short positions, suggests that this category of investors is betting on a euro appreciation against the dollar in the short term.
Example 2: a sharp decrease in long positions by asset managers accompanied by a sharp increase in short positions suggests a bet on a depreciation of the euro over the medium-long term.
Therefore, following what investors do and replicating their sentiment, captured by their committments, can be a good trading strategy. The empirical evidence shows the existence of a strong correlation between the COT positions and the actual performance of the EURUSD. Obviously, like any statistical evidence, it should not be taken as an absolute law.