There are three main groups in the COT report:
Knowing the groups is nice, but what matters is what a trader can do with such information. These are the most common ways top-traders use the COT report.
As a volume indicator
Conservative traders look at the COT as a way to check if the volume traded compliments use technical analysis. This type of trader will avoid making a move on a pair if the COT signals something opposite to what their study suggested. So if this trader is expecting a rise, they should see also a growth in the open interest. Likewise, the same will be valid for a fall.
It is a very safe strategy that tends to produce positive results consistently, but it also leads to some big misses.
Taking advantage in reversals
More risky traders look at the COT and look for ways to go against the grain. To anyone considering this path, it is not for faint of heart. There is a high risk when you are betting against the position taken by a large part of the market. That is why most traders interested in doing this hedge their bets by opening positions in uncorrelated pairs.
That said, there is no denying that following this strategy will yield high dividends.
Following the trend
Those who are not super conservative but are not extreme risk takers either, look at the COT for guidance. It is a solid strategy with little downside. However, it does have little upside as well. Due to the nature of the report, it is impossible not to have a USD-heavy portfolio if the COT is used to build a forex trading portfolio. Moreover, the revenues are relatively small, since all a trader is doing is following the trend.
Overall, it is a safe but not ideal to use the COT as a means to build a portfolio. The goal of any trader is to be as neutral as possible, so to avoid overinvesting in a single pair due to over-commitment.
The COT report is a powerful tool that gives any trader the flexibility to follow different paths when creating their trading strategy. The most important part is to remember that the COT data is another tool and shouldn't be used alone when making a trading strategy.
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