Trading Strategy Based On Market Sentiment (Part IV)
The mood of the currency market depends on what the majority of the traders are thinking about the present market situation. How do you measure the currency market sentiment? You can get an idea of the overall market sentiment by reading reports written by analyst and financial journalist in the news wires. You can also join online trading forums to see what other traders are thinking about the current market situation to form your opinion on the market sentiment.
You may think that the other traders are in a buying or selling mood. But that may not be what is really happening in reality. This way of getting the feel of the market sentiment is not very accurate.
What is the COT report? The COT report provides the detailed positioning information about the futures market on a weekly basis. You will ask how we gauge the market sentiment. You can accurately gauge the spot forex market sentiment by analyzing the Commitment of Traders (COT) report.
Many forex traders dont know about it. COT report is one of the most underrated reports. Forex traders can use COT report to gauge the market sentiment. You can assess the COT report on the CFTC website for free. The COT report is compiled by the Commodity Futures Trading Commission (CFTC) in the United States. It is released every week on every Friday at 15:30 EST.
Two types of COT reports are made available on the CFTC website. The first is the futures only COT Report. The second is the futures and options combined COT Report. A look at the futures only COT report is what you need every week. It will give you the glimpse of what has happened in the currency futures market and its implications for the spot forex market.
The data used in the COT report is three days old. Savvy currency traders spend their weekends going through the COT report. So the information in the COT report can be nonetheless useful to you. It hardly takes fifteen minutes to make a judgment. No doubt there is a time lag between the reporting of data and the release of the report. But still you can use this report to gauge the market sentiment.
There are three categories in the COT report. The three categories are: 1) Commercial, 2) Non-commercial and 3) Non-reportable. The COT report tells you the long and short positions undertaken by participants from each category.
Commercial: The commercial category consists of those currency futures market participants who use the futures contract for hedging purposes. These commercial participants are mostly exporters and importers in the market. They are hedging against the currency fluctuations for the next few months. Lets take an example, suppose Japanese company Toyota expects to receive $500 million worth of sales from the US market in the next quarter.
In order to hedge against the US Dollar decline, Toyota company will short $500 millions in JPY Forex Futures. Similarly if the US pharmaceutical company exports $50 million worth of drugs to the Japanese market in the next quarter, it will long $50 million JPY Forex Futures.
Non-commercial: This category consists of large speculators like hedge funds, banks, institutional investors and so on who speculate in forex futures.
Non-reportable: This category comprises small speculators like you and me also known as the retails traders.
