Most short-term traders or speculators trade FX based on technical analysis, so equity and futures traders who use technical analysis have made the switch to FX fairly easily. Since the currency market is decentralized and there is no one exchange that tracks all trading activities, it is difficult to quantify volume traded at each price level.
The data was originally released just once a month, but moved to once every week in Along with reporting more often, the COT report has become more extensive and - luckily for FX traders - it has also expanded to include information on foreign currency futures. If used wisely, the COT data can be a pretty strong gauge of price action. The caveat here is that examining the data can be tricky, and the data release is delayed as the numbers are published every Friday for the previous Tuesday's contracts, so the information comes out three business days after the actual transactions take place.
Here is a quick list of some of the items appearing in the report and what they mean:. Noncommercial data, on the other hand, is more reliable because it captures traders' positions in a specific market.
There are three primary premises on which to base trading with the COT data:. Before looking at the chart shown in Figure 2, we should mention that in the futures market all foreign currency exchange futures use the U. For this reason, the axis on the left shows negative numbers above the center line and positive numbers below it. The chart below shows that trends of noncommercial futures traders tend to follow the trends very well for CHF.
The next flip occurs in September , when noncommercial traders become net long once again. On the chart we continue to see various buy and sell signals, represented by points at which green buy and red sell arrows cross the price line.
Each currency pair has different characteristics, especially the high-yielding ones, which rarely see flips since most positioning tends to be net long for extended periods as speculators take interest-earning positions.
In this example, the left axis of the chart is reversed compared to Figure 2 because the GBP is the base currency. The reason why these extreme positions are applicable is that they are points at which there are so many speculators weighted in one direction that there is no one left to buy or sell.
As a result, exhaustion ensues and prices begin reversing. Open interest is a secondary trading tool that can be used to understand the price behavior of a particular market.
The data is most useful for position traders and investors as they try to capitalize on a longer-term trend. Open interest can basically be used to gauge the overall health of a specific futures market; that is, rising and falling open interest levels help to measure the strength or weakness of a particular price trend. For example, if a market has been in a long-lasting uptrend or downtrend with increasing levels of open interest, a leveling off or decrease in open interest can be a red flag, signaling that the trend may be nearing its end.
Rising open interest generally indicates that the strength of the trend is increasing because new money or aggressive buyers are entering into the market.
Declining open interest indicates that money is leaving the market and that the recent trend is running out of momentum. Trends accompanied by declining open interest and volume become suspect. Rising prices and falling open interest signals the recent trend may be nearing its end as fewer traders are participating in the rally. Notice that market trends tend to be confirmed when total open interest is on the rise. In early May , we see that price action starts moving higher, and overall open interest is also on the rise.
One of the drawbacks of the FX spot market is the lack of volume data. To compensate for this, many traders have turned to the futures market to gauge positioning. Based on empirical analysis, there are three different ways that futures positioning can be used to forecast price trends in the foreign-exchange spot market: It is important to keep in mind, however, that techniques using these premises work better for some currencies than for others. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Here is a quick list of some of the items appearing in the report and what they mean: There are three primary premises on which to base trading with the COT data: Changes in open interest can be used to determine strength of trend. Flips in Market Positioning Before looking at the chart shown in Figure 2, we should mention that in the futures market all foreign currency exchange futures use the U.
Sentiment Indicators are another tool that can alert traders to extreme conditions. With the increased interconnectivity of the global markets these days, it pays to understand market relationships. Professional market players are some of the best models for the individual small trader to mimic. Volume should inform your use of this indicator in confirming trends and reversals. Knowing what the market is thinking is the best way to determine what it will do next.
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