7 Winning Strategies For Trading Forex
Ways of Measuring Market Sentiment The mood of the market depends mainly on what the majority of traders think about the current market situation. But how can you get an idea of the overall sentiment of the market? You can do so by reading reports by analysts and financial journalists in news wires or by visiting online trading forums to see what other traders are discussing. However, these ways of getting a feel of the current market sentiment are not too accurate; you may think that other traders are in a buying or selling mood, but that may not be what is really happening in reality. Here are some of the more effective ways of gauging market sentiment:
1. The Commitment of Traders (COT) report 2. The market’s reactions to news releases
These are explained in more details below.
1. Commitment Of Traders (COT) report What is the COT?
The COT report provides traders with detailed positioning information about the futures market, and is, in my opinion, one of the most underrated tools that forex traders can make use of to enhance their trading performance.
The report is compiled and released weekly by the Commodity Futures Trading Commission (CFTC) in the United States every Friday at 15:30 Eastern Time, and records open interest information about the futures market based on the previous Tuesday. Anyone can access the COT report for free on the CFTC website (www.cftc.gov/cftc/cftccotreports.htm).
There are basically two types of reports available: the futures-only COT report and the futures-and-options-combined COT report. I usually just access the futuresonly report for a glimpse of what has happened in the futures dimension of the forex market. In order to get through to the currency futures data, you have to wade past other commodities like milk, feeder cattle and so on, so a little patience is required.
Even though the data arrives three days late, the information nonetheless can be helpful since many traders spend their weekend analyzing the COT report. The time lag between reporting and release is the main handicap of the COT data, but despite this limitation, you can still use it as a sentiment tool.
Figure 5.3 shows a page from the December 19, 2006, COT report (short format), displaying data for the Chicago Mercantile Exchange’s Euro FX futures contract. You can see the long and short positions held by traders in each of the three main categories defined by the CFTC, as explained below.
90