The mood of the currency market depends on what the majority of the traders are thinking about the present market situation. How do you measure the currency market sentiment? You can get an idea of the overall market sentiment by reading reports written by analyst and financial journalist in the news wires. You can also join online trading forums to see what other traders are thinking about the current market situation to form your opinion on the market sentiment.
You may be thinking that the other currency traders are in a buying or selling mood for USD. But that may not be what is really happening in reality. You should know that this way of getting the feel of the market sentiment is not very accurate. It is not a good method.
How do you gauge the market sentiment effectively then? You can accurately gauge the market sentiment by reading the Commitment of Traders (COT) report. What is COT? The COT report provides the detailed positioning information about the futures market.
COT report is one of the most underrated reports. Many forex traders dont know about it. Forex traders can use COT report to gauge the market sentiment. You can assess the COT report on the CFTC website for free. The COT report is compiled and released by the Commodity Futures Trading Commission (CFTC) in the United States on a weekly basis every Friday at 15:30 EST.
Two types of COT reports are made available on the CFTC website. The first is the futures only COT Report. The second is the futures and options combined COT Report. A look at the futures only COT report is what you need every week. It will give you the glimpse of what has happened in the currency futures market and its implications for the spot forex market.
Savvy currency traders spend their weekends going through the COT report. The data used in the COT report is three days old. No doubt there is a time lag between the reporting of data and the release of the report. But still you can use this report to gauge the market sentiment. The information in the COT report can be nonetheless useful to you. It hardly takes fifteen minutes to make a judgment.
There are three categories in the COT report. The three categories are: 1) Commercial, 2) Non-commercial and 3) Non-reportable. The COT report tells you the long and short positions undertaken by participants from each category.
Commercial: This category consists of market participants who use the futures contract for hedging purposes. These commercial participants are mostly exporters and importers who hedging against the currency fluctuations risk. For example, Japanese company Toyota expects to receive $500 million worth of sales from the US market in the next quarter.
In order to hedge against the US Dollar decline, Toyota company will short $500 millions in JPY Forex Futures. Similarly if the US pharmaceutical company exports $50 million worth of drugs to the Japanese market in the next quarter, it will long $50 million JPY Forex Futures.
Non-commercial: This category consists of large speculators like hedge funds, banks, institutional investors and so on who speculate in forex futures.
Non-reportable: This category comprises small speculators like you and me also known as the retails traders.
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