Trading Strategy Based on Market Sentiment (Part V)
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.
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.
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.
Forex futures are traded on a Centralized Exchange Chicago Mercantile Exchange (CME). CME functions as a clearing house between the counter parties. 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. So no volume and net position data is available for the spot forex market.
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. The spot and futures prices of a currency tend to move in tandem. For example, if GBP futures price goes up spot GBP/USD goes up too. You should become familiar with the differences in price quotation system used in both the markets.
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 is also true when a particular currency is trending down against the US Dollar. The non-commercials will have a net short position when the market is trending down against USD. You can tell if the latest net positioning is skewing towards an extreme reading by comparing the latest net positioning with that of the past few weeks or months.
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. - 23223
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.
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.
Forex futures are traded on a Centralized Exchange Chicago Mercantile Exchange (CME). CME functions as a clearing house between the counter parties. 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. So no volume and net position data is available for the spot forex market.
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. The spot and futures prices of a currency tend to move in tandem. For example, if GBP futures price goes up spot GBP/USD goes up too. You should become familiar with the differences in price quotation system used in both the markets.
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 is also true when a particular currency is trending down against the US Dollar. The non-commercials will have a net short position when the market is trending down against USD. You can tell if the latest net positioning is skewing towards an extreme reading by comparing the latest net positioning with that of the past few weeks or months.
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. - 23223
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 @ 5:42 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home