How To Find Institutional Supply And Demand Zones Using The COT Report

I’ve stumbled upon a free tool that makes the hunt for institutional, high probability supply and demand zones so much easier.

Ever read the Commitment Of Traders (Cot) Report?

Pain in the ass, right?

Enter: The Cot Graph!

Drawing on data from the Commitment of Traders report, the Cot graph reveals whether the smart money (non-commercial) traders have ramped up or scaled down their buying or selling. All institutional trading firms report their net-increase/decrease in open positions vs other market participants.

In a nutshell: You can see when smart money are entering/exiting positions. Then, by correlating their buying and selling with the previous price action, find their trading activity.

This makes it a breeze to identify killer supply and demand zones.

Sounds like a plan?

Let’s jump in…

Supply and demand zones don’t grow on trees, and hunting down the best zones usually calls for a deep knowledge, built over many years of trading.

Or, well, it used to…

Step in: The Cot Report.

Released every Friday, the Commitment of Traders report reveals the positions of institutional traders operating in the forex, commodities, and futures markets. The report reveals whether there’s been an overall increase in net-longs (buy trades) or net shorts (sell trades) in the market.

You can peek into whether smart money are entering or removing positions.

By understanding how the smart money operate and applying some simple math, you can use this information to pinpoint where institutional supply and demand zones are hiding.

Take the zone below, for instance…

Given it’s somewhat weak move away and swing position, the supply zone above doesn’t seem like much, but actually holds a high probability of triggering a reversal.

How can I tell?

During the week the zone formed, there was a surge in the number of sell positions placed by the banks, hedge funds and other institutions.

Check out the Cot Graph:

During the week the zone formed (Between the 24th and 27th of March), there was a surge in the number of short non-commercial positions placed by banks, hedge funds and other institutions.

Just check the numbers: Smart money (non-commercial) executed 24,000 new sell positions – an enormous jump compared to the previous weeks more bullish reports.

These new sell positions had to be entered somewhere, but where?

Smart money can only sell when demand is high – since they must sell to buyers. Therefore, it’s resonable to assume their sell positions were placed during the peak of the rally (the swing high). That’s when market sentiment was most bullish with many willing buyers available.

SM now have a strong incentive to drive price down if returns to this zone.

And, lo and behold…

After a few days of bearish accumulation (notice those highs peaking inside the zone), supply finally overpowered the demand trying to enter. This confirms the smart money likely entered their sell positions here, as shown by the increase in net-shorts from the COT graph data.

See how using the Cot graph makes finding institutional zones a piece of cake?

I’m living proof you don’t need a fancy degree to use the COT graph. But, there’s a slight catch… you still gotta follow the right steps to identify strong zones vs weak ones.

And that’s where I come in:

I’ve created a 3-step method for locking down institutional zones using the COT graph. These steps make it easy to pull the net-increase/decrease data from the graph, then use it to quickly identify and filter the top supply and demand zones.

Just open the tool, grab the data, and mark your zone.

Easy, eh?

Step 1: Locate The Zone You Want To Check

First things first: Find the zone on your chart that you want to investigate using the COT graph.

Remember, we’re not using the COT graph to discover new zones, but rather to double-check the ones already identified. So, pick a zone that looks promising – maybe it’s recent, or it has a nice clean structure, or it just catches your eye.

Okay, this EUR/USD 1-Hour Supply zone looks interesting. Let’s see if the COT graph can shed some light on its formation and potential market strength.

Time to put it to the test!

Step 2: Check The Increase In Net-Shorts Or Longs When The Zone Formed

Open the COT graph using the link and check the increase in net-shorts (for supply zones) or net-longs (for demand zones) during the week your zone developed.

Compare the numbers mentally or just note them down and then check the price action. Your looking for a large uptick – a significant leap vs the previous weeks. This signals the smart money executed a large number of new positions, telling us that whatever supply and demand zones formed must pack a punch.

So, let’s get cracking…

Before checking the Cot graph: Identify the dates from the beginning and end of the week your zone developed (between the 21st and 25th of January, for the supply zone)

Important: Given the COT graph updates weekly, you must hover over the figures for the previous few weeks to see if the number of net-longs/shorts climbed or declined.

For the week of January 21st to 25th, the COT graph shows a whopping 239,515 sell positions open in the market from non-commercial traders (aka the smart money). Compare that to the previous week, where there were only 215,235 sell positions open.

That’s a net increase of 24,280 sell positions – a giant leap week-over-week.

Smart money was aggressively building up their short positions during the week the supply zone formed. They were clearly betting on price to continue falling.

But how many of those 24,280 new sells contributed to the supply zone?

What other points could smart money sell heavily?

Let’s find out…

Step 3: Confirm Institutional Activity At The Supply/Demand Zone

Just because you see a jump in net shorts on the COT graph, don’t assume the smart money dumped all their new sell orders at the supply zone.

Remember: Smart money can only sell when buying (demand) dominates the market.

A longer upward move before a supply zone forms means more traders were buying, creating a larger pool of buyers for the smart money to sell to. This is a key piece of the puzzle. It helps us narrow down where the 24,280 sell orders were likely placed.

Let’s zoom in on the week the net shorts spiked:

Take a look at the price action leading up to the upper supply zone… see the decent amount of buying (demand) before the zone formed?

Now compare the buying to the smaller supply zone below it.

Night and day, right?

The bullish momentum leading up to the upper zone was much stronger. The back-and-forth price action, with multiple higher highs and bullish candlesticks, shows far more willing buyers were present here than before the lower supply zone formed.

This tells us the upper supply zone developed due to a larger influx of smart money sell positions, making this a clear, institutional supply zone.

A week later, the market revisits the institutional supply zone. Supply once again overwhelms demand, triggering a sharp reversal downwards.

This is the power of identifing and trading institutional supply and demand zones. By understanding how they form and using the COT graph to confirm their strength, you can position yourself to trade alongside the smart money and profit from their buying or selling.

Not bad, eh?

Let’s be real, pinpointing high-impact supply and demand zones will never be a walk in the park. But the COT graph takes the guesswork out of zone identification, giving you a major leg up in spotting institutional zones originating from smart money activity.

Give it a try yourself, and you’ll soon see what I mean.

Until next time, traders!

While the supply zone is the easy guess, we can’t just leap to the conclusion they were all dumped at the zone… it’s too simplistic. We need to take a closer look at what else happened during the week, check if any other zones also fit the bill.

Let’s dive in…