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Currency Futures Trading

The COT report: This is another of those useful sources of information which currency trading forex annamost retail currency traders never find let alone use.

Futures Currency Trading - COT Report

The COT report stands for the Commitment of Traders report and is published on a weekly basis by the CFTC ( US Commodity Futures Trading Commission )  and is available in both the long and short version every Friday at 3.30 pm EST. The original reports concentrated on the more traditional areas of agriculture and commodities, but more recently the report has been expanded to include the currency markets. In essence the data reports on the numbers of open interest futures contracts held by large commercial ( hedge funds, banks etc ) and non-commercial (speculators ) traders ( big and small to you and me ),  and whether contracts have been bought or sold. So in effect we are looking at a market sentiment indicator, much like the VIX in stock trading. One of the drawbacks to the spot FX market is the lack of volume, and many traders are now turning to other markets, such as the currency futures market, to help them gauge their positions from the market sentiment and volume of futures contracts traded.

This is a much more classical approach using currency futures trading, where the study of one market, in this case the currency futures market, gives us an insight into the cash or alternative market.  Now, whilst the report is available in data format from the CFTC, it is more commonly used in chart form which allows us to see the data presented in a more user friendly chart format with the usual candlestick bars. You may be able to find these charts on the web for free, but I would suggest you subscribe to a good chart provider to get the best charts available. As an aside, there have been rumours recently that the CFTC might stop publishing these reports as many retail traders find them extremely accurate in forecasting turning points in the market and changes in sentiment - whether this will happen is unclear. No doubt this move has been prompted by the commercial traders!

COT Report

In general, ( and it does vary from each chart provider ) the chart will show you the two principle groups as outlined above of commercial, and non commercial. Some charts may show a third group which is non-commercial broken up into large speculators and small speculators ( small generally meaning the retail trader). In addition to showing the volumes of buy and sell contracts for each group, the chart will also show the number of OI ( open interest ) contracts in the market. What we are looking for in the data which is presented at the bottom of the chart are the extremes. Extreme positioning in the currency futures market has historically often been extremely accurate in identifying key market reversals.

For those of you who are familiar with volume spread analysis the basis of the technique is to try to identify extremes, whether very high volume or very low volume and to analyse this using the price action shown on the chart. With the COT charts we are looking for these extremes - where so many speculators ( non-commercial) have all traded in the same direction, that there is no-one left to buy or sell. Oddly when this happens you will generally find that the commercial traders are all weighted in an opposite direction. So we can use the charts in one of two ways. Firstly assume that when speculators are buying in large volumes then the chances are they are always wrong, and therefore the market is about to turn ( the contrarian approach if you like ), and secondly that the commercial traders will generally be right, and to simply follow them ( this is the approach I take which also mirrors volume spread analysis where we follow the professional money by watching the volume of trades in the cash market) .

The currency trading charts that are available are for those currencies which form the US Dollar Index, which itself is also available in chart format, since index futures are traded. I personally use these charts for long term trading decisions and would be happy to recommend some chart providers if you would like to use this strategy in your trading - I can assure you it is worth the effort and the charts will not be expensive - normally provided on a small monthly fee basis.

If you would like more detailed information I have recently published a site which explains the COT report in more detail. Please just follow the link which will take you to the site which is now being updated with weekly reports which you will shortly be able to download for free, and which will provide a detailed analysis of all the markets. OK,  now let's take a look at currency options - not where I expect you to start but at least you ought to be aware of them, for use later in your currency trading life!

 

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