COT?
It stands for Commitments Of Traders report.
In this example, you'll see the Commitments Of Traders for AUD/USD futures plotted.
What can you see?

The Commodity Futures Trading Commission (CFTC) calculates the data every Tuesday and releases it on the subsequent Friday.
Although the weekly data is almost 7 days old, you see:
 

1. commercials have been increasingly exiting longs

2. speculators have been increasingly accumulating longs

Who are you going to side with, commercials or speculators?
We'll get to that in a moment..

Sticking with AUD/USD futures...
For context see a daily chart. What's clear?

• As far back as March 2021 AUD/USD has been in decline.

• The real test of bulls versus bears during that period was April/May 2022 (red eclipse).

• The difference in 2023 is the "floor" in prices established over the last month (blue eclipse).

• What is price butting up against now? The April May prior "battle".

Further context: 

How did the market treat the recent employment numbers for Australia? It shrugged the weaker-than-forecast numbers and continued to rise. The employment numbers were the catalyst for the current move up. 

And the final piece of the context? Liquidity. If you were trading intraday the prior week you would have observed how the price frequently moved higher on low volume.

When you join the dots, you can see commercials have been unwinding their long positions. Yet the price is moving up? Yes, players artificially bid up the price by taking out all offers. And each time price moves up, commercials wait until speculators agree to higher prices so they can exit into the new enthusiastic buying.  

The image below plots "offers lifted" (green) and "bids hit" (red). Using the intensity of the red or green boxes, you see the red eclipse highlights where the most aggressive selling occurred the day before the employment data.

It's likely commercial participants were exiting given the quantity and also that it occurred at a relative value proprietary calculation.

You can also see aggressive buying (lifting offers) at roughly the same prices. Speculators are both entering new long positions and covering old short positions. Remember the COT data indicating speculators increasing their long exposure?

If commercials have liquidated who's going to sustain price movement higher?

Once commercials exit their longs, who is going to bid prices higher? A significant sell-off of roughly 160 basis points occurred during the trading session before employment data. But a massive sell-off represents an enticing discount for traders to get long in a market trending upwards.

Using COT and observations above, you hypothesise speculators will enter long to drive up price at least in the short term. Meanwhile, you see commercials moving away from the long side.
 

Short or long the AUD/USD?

The market shrugs off negative employment data and returns to rising, giving speculators confidence to continue entering long positions. But back to the first question, who to side with? Commercials or
Speculators?

 When asked, most of you side with the commercials. However, while the COT data is beneficial, it's not the panacea. That's why you combine multiple pieces of evidence to develop a thesis, as illustrated above.

 There's no need to pick a top or a bottom, ever. The current direction is up. So in this scenario, you can trade the long side conservatively, meaning you'll take modest profits. And that's because you're looking closely for the opportunity to join the short side. You are waiting for ducks to line up, signalling new long speculators exit putting downward pressure on price.

That's everything for now!

Related reading:

🔗 Accept the politics in trading? A guide to playing the game.