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COT Report (Part II)

You should focus on the non-commercial participants rather than on the commercial participants when you look at the COT report. You would ask the reason for ignoring the commercial category. Commercial participants are mostly trading forex futures for hedging purposes. They keep on rolling on their positions from month to month for hedging even though they maybe taking losses. This way they are hedging the foreign exchange risk for their business transactions.Try Netpicks forex signal service.

Get good forex training.However, large speculators like the hedge funds and the banks trade the forex futures contract for speculation and capital gains only. Most will immediately close their losing position instead of rolling it over to the next month. Large speculators do not have any intention of taking delivery of the currency in cash like the commercial participants. Learn forex trading.

There is a close correlation between the forex futures market and the spot forex market. By gauging market sentiment in the forex futures market, you can also gauge the market sentiment in the spot forex market.

Forex futures are basically spot prices adjusted for the forwards to arrive at the future delivery price based on the interest rate differentials. Near the maturity of the forex futures contract, both the prices converge. Prices become equal on maturity.

The main difference between the spot forex market and the forex futures market is that the spot forex market is not a centralized market. It is an Over the Counter (OTC) market. However, Forex futures are traded on a Centralized Exchange Chicago Mercantile Exchange (CME). CME functions as a clearing house between the counter parties.

There are some differences in price quotation system used in both the markets that you should become familiar with. However, the spot and futures prices of a currency tend to move in tandem. When either the spot or the future price of the currency rises, the other also tends to rise and when either falls, the other also tend to falls. For example, if GBP futures price goes up spot GBP/USD goes up too.

Calculate the net position of the non-commercial contracts in the COT report by subtracting the total long positions from the total short positions. Usually when a particular currency is trending up against the US Dollar, the non-commercials tend to register a net long position. This is due to the fact that the large speculators like to continue riding the trend as long as it lasts.

The opposite would be also true when a particular currency is trending down against the US Dollar. The non-commercials will have a net short position. By comparing the latest net positioning with that of the past few weeks or months, you can tell if the latest net positioning is skewing towards an extreme reading.

Dramatic price moves like the major turning points tend to occur when the majority of the market is positioned incorrectly. By keeping an eye on the net directional positioning and net contract volume in the non-commercial category, you can detect turning points in the spot forex market with the COT reports.

What deters many traders from using the COT report is its raw organization of data. COT report is a treasure trove. You can use your COT report analysis to optimize your trading strategies. Entry and exit cannot be timed solely based on COT report but it can generate warning signals of a possible turn ahead in the spot forex market.

COT Report & Currency Trading (Part I)

What are the ways of measuring the market sentiment? The mood of the market depends on what the majority of the traders think about the current market situation. How do you get an idea of the overall market sentiment? By reading reports of analyst and financial journalist in the news wires! You can also join online trading forums to see what other traders are thinking.Develop your own forex trading system.

Get good forex training. 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.

Learn forex trading. You will ask how you gauge the market sentiment then. You can accurately gauge the spot forex market sentiment by analyzing the Commitment of Traders (COT) report. What is COT report? The COT report provides the detailed positioning information about the futures market on a weekly basis.

COT report is one of the most underrated reports. Many forex traders don’t know about it. 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 and released by the Commodity Futures Trading Commission (CFTC) in the United States on a weekly basis every Friday at 15:30 EST.

Basically two types of COT reports are made available. The one is the futures only COT Report and the second is the futures and options combined COT Report. A look at the futures only COT report will give you the glimpse of what has happened in the futures currency market and its implications for the spot forex market.

The data arrives three days later. Many traders spend their weekends going through the COT report. So the information in the COT report can be nonetheless useful to you. 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: This category consists of market participants who use the futures contract for hedging purposes. These commercial participants are mostly exporters and importers who hedging against the currency fluctuations risk. For example, 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: The non-commercial category consists of large speculators like hedge funds, banks, institutional investors and so on who want to speculate in currency futures.

Non-reportable: This category comprises small speculators like you and me also known as the retails traders.