Trading Strategy Based on Market Sentiment (Part V)
Rather than looking at the commercial participants, you should focus on the non-commercial participants when you look at the COT report. You would want to know the reason for ignoring the commercial category in the COT report. Commercial participants are mostly trading currency futures for hedging their future business transactions against exchange rate fluctuations. Commercial participants are mostly large transnational companies. These companies keep on rolling their positions from month to month for hedging even though they maybe taking losses.
However, large speculators like the hedge funds, the banks, big institutional investors and so on, trade currency futures contracts for speculation and pure capital gains only. Hedge funds are a major player in this category. Most of the large speculators will immediately close their losing position instead of rolling it over to the next month. Non-commercial participants do not have any intention of taking delivery of the currency in cash like the commercial participants.
By gauging market sentiment in the forex futures market, you can also gauge the market sentiment in the spot forex market. There is a close correlation between the currency futures market and the spot forex market.
Near the maturity of the forex futures contract, the spot forex and the currency future prices converge. Prices become equal on maturity. Currency futures are basically spot prices adjusted for the forwards based on the interest rate differentials to arrive at the future delivery price.
The main difference between the spot forex market and the forex futures market is that the spot forex market is Over the Counter (OTC) market. It is not centralized. However, Forex futures are traded on a Centralized Exchange Chicago Mercantile Exchange (CME).
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.
By subtracting the total long positions from the total short positions, calculate the net position of the non-commercial contracts in the COT report. The non-commercials tend to register a net long position when a particular currency is trending up against the US Dollar. This is due to the fact that the large speculators mostly hedge funds like to continue riding the trend as long as it lasts.
The opposite is also true when a particular currency is trending down against the US Dollar. When the market is trending down against USD, 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.
You can detect turning points in the spot forex market with the COT reports by keeping an eye on the net directional positioning and net contract volume in the non-commercial category. When the majority of the market is positioned incorrectly, dramatic price moves like the major turning points tend to occur.
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. What deters many traders from using the COT report is its raw organization of data. COT report is a treasure trove. - 23204
However, large speculators like the hedge funds, the banks, big institutional investors and so on, trade currency futures contracts for speculation and pure capital gains only. Hedge funds are a major player in this category. Most of the large speculators will immediately close their losing position instead of rolling it over to the next month. Non-commercial participants do not have any intention of taking delivery of the currency in cash like the commercial participants.
By gauging market sentiment in the forex futures market, you can also gauge the market sentiment in the spot forex market. There is a close correlation between the currency futures market and the spot forex market.
Near the maturity of the forex futures contract, the spot forex and the currency future prices converge. Prices become equal on maturity. Currency futures are basically spot prices adjusted for the forwards based on the interest rate differentials to arrive at the future delivery price.
The main difference between the spot forex market and the forex futures market is that the spot forex market is Over the Counter (OTC) market. It is not centralized. However, Forex futures are traded on a Centralized Exchange Chicago Mercantile Exchange (CME).
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.
By subtracting the total long positions from the total short positions, calculate the net position of the non-commercial contracts in the COT report. The non-commercials tend to register a net long position when a particular currency is trending up against the US Dollar. This is due to the fact that the large speculators mostly hedge funds like to continue riding the trend as long as it lasts.
The opposite is also true when a particular currency is trending down against the US Dollar. When the market is trending down against USD, 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.
You can detect turning points in the spot forex market with the COT reports by keeping an eye on the net directional positioning and net contract volume in the non-commercial category. When the majority of the market is positioned incorrectly, dramatic price moves like the major turning points tend to occur.
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. What deters many traders from using the COT report is its raw organization of data. COT report is a treasure trove. - 23204
About the Author:
Mr.Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Trade The Forex News! Learn Forex Trading.
posted by X - Men @ 5:46 AM
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