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Market Sentiment and COT Report Details Overview

Market Sentiment and COT Report Details Overview

What is Market Sentiment in Forex?

Market SentimentIn the realm of forex, market sentiment encompasses the collective mindset and sentiment of traders and investors concerning a specific currency pair or the broader forex market. It reflects the overall attitude and emotions exhibited towards these entities. It is a measure of whether market participants are generally bullish (expecting prices to rise) or bearish (expecting prices to fall). 

Market sentiment can be influenced by various factors, such as economic indicators, political events, and global news.

What Is Market Sentiment Analysis?

Market sentiment analysis involves the examination and interpretation of the overall sentiment prevailing among market participants. This process enables traders to make well-informed decisions when it comes to trading. It involves analyzing various data sources, such as price action, trading volume, and market news, to measure the usual sentiment. 

Traders use this analysis to identify potential trends, reversals, or market extremes, which can help them make better decisions on when to enter or exit trades. By understanding market sentiment, traders can potentially capitalize on dominant market biases and improve their overall trading performance.

How to Measure Forex Sentiment?

As a forex trader, your primary task is to assess the prevailing sentiment in the market. Are the indicators suggesting a bullish outlook?

Are traders expressing bearish sentiments about the economy?

We cannot dictate the market’s behavior based on our own opinions. However, we can respond to the market’s movements and adapt accordingly.

It’s important to note that employing the market sentiment approach does not provide exact entry and exit points for each trade. But there’s no need to lose hope!

Incorporating a sentiment-based approach can assist you in determining whether it is advisable to follow the prevailing market direction or not.

Certainly, you have the option to combine market sentiment analysis forex with technical and fundamental analysis to generate more refined trading concepts.

When it comes to stocks and options, traders often consider traded volume as an indicator of sentiment.

If a stock’s price has been increasing, but the volume of trades is decreasing, it could potentially indicate an overbought market condition.

On the other hand, if a declining stock suddenly reverses its trend on high volume, it suggests a shift in market sentiment from bearish to bullish.

Since the forex market is decentralized and traded over-the-counter, it lacks a centralized marketplace. Consequently, measuring the volume of each currency traded is not easily achievable.

So, you might ask how to measure forex sentiment!!

Well, you can try commitment of traders report to take market sentiment approach in forex.

What is Commitment of Traders Report (COT)?

Every week, the U.S. Commodity Futures Trading Commission (CFTC) releases the Commitment of Traders Report. This report, tracing its roots back to 1924, originated from the annual publication by the U.S. Department of Agriculture’s Grain Futures Administration. It provides a comprehensive breakdown of open interest in futures markets, covering a wide range of commodities, including currencies. By 1962, the report transitioned to a monthly publication. In the 1990s, it shifted to a bi-weekly frequency before ultimately becoming a weekly publication in 2000.

The report shows the positions held by different categories of market participants, such as commercial traders (hedgers), non-commercial traders (large speculators), and non-reportable traders (small speculators).

Traders and investors find the commitment of traders report to be an invaluable resource due to its ability to provide valuable insights into market sentiment and potential price movements in the future. By analyzing the positions held by different groups of traders, one can get a sense of whether the market is predominantly bullish or bearish. For instance, when non-commercial traders, commonly known as large speculators, hold a substantial net long position in a currency, it often signals a bullish sentiment. Conversely, a significant net short position tends to suggest a bearish sentiment.

In the context of forex trading, the COT report forex can be used to gauge the sentiment of large institutional traders towards various currency pairs. By monitoring changes in their positions over time, traders can identify potential trends or reversals in the market, which can help inform their trading decisions.

However, it’s important to note that the commitment of traders report should be used in combination with other forms of analysis, as it is just one piece of the puzzle when it comes to understanding market dynamics.

Usually, The Commitments of Traders reports are released at 3:30 p.m. Eastern time. Both the Futures Only reports and the Futures and Options Combined reports are typically released on Fridays. These reports typically contain data from the previous Tuesday.

The report undergoes a thorough compilation process on Tuesday and subsequent verification on Wednesday, ensuring its accuracy before being released every Friday. It presents the data in a graphical format, aiming to provide insights into market dynamics. As per the U.S. Commodity Futures Trading Commission, the report encompasses the open interest of futures and options on futures markets each Tuesday, specifically focusing on markets where 20 or more traders hold positions meeting or exceeding the reporting thresholds established by the CFTC.

How to Find the COT Report?

Check the following steps to find the COT report online.

Step 1

Open you browser and go to (https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm).

Step 2

The second step requires you to load that page and once its open scroll down to the “Current Legacy Report” and then open the “Short Format” section in the “Futures Only” column on the row featuring the “Chicago Mercantile Exchange” for you to get access to the latest COT report forex.

How to Find the COT Report

Step 3

The third step is to find the report, and although it might be intimidating because it appears like a gobbled-up text block, you can still find what you are looking if you put a little effort. Use the find function on the browser or CTRL+F and factor in the preferred currency you are after.

For instance, if your preferred currency is GBP type “Pound Sterling” and you will be immediately be redirected to the section shown below.

There are different categories in the chart, and each refers to something else.

Commercial: Associate with large businesses that normally utilize currency futures in hedging and protecting themselves from uncertainty resulting from exchange rate fluctuations.

Non-Commercial: this is a combination of hedge funds, individual traders as well as financial institutions. Traders here mostly are those after trading for speculative gains. In essence, the traders are just like you who is in it just for the money.

Short: refers to the number of short contracts that the CFTC has reported.

Long: These are the number of long contracts that have been reported by the CFTC.

Open Interest: The column shows the sum of contracts that have not been delivered or exercised.

Reportable Positions: this is according to the CFTC regulations, the number of futures and options positions that are supposed to be reported.

Non-reportable Positions: These are the open interest positions that have not met CFTC’s necessary reportable requirements like retail traders.

There is so much information in the COT indicator, but it doesn’t necessarily mean that you will memorize everything. As a growing forex trader, you will only need to worry about the market sentiment for the week.

Understanding the COT Report

Before trading in the future market, it is important to understand the different players that are active in the market. These participants are broadly divided into three groups:

  • Retail traders (Small Speculators)
  • Non-commercial traders (Large Speculators)
  • Commercial traders (Hedgers)

Retail traders (Small Speculators)

Retails traders have smaller retail accounts. This group constitutes of individual traders and hedge funds. They don’t take trades as per the trend and hence are mostly on the opposite side of the market. This makes them less successful than commercial traders and hedgers. When they initiate trades as per the trend, then they are highly focused on market bottoms or tops.

Non-commercial traders (Large Speculators)

Large speculators are in the market only for the money. They are in no way interested in keeping the underlying asset. Several speculators are termed as hardcore trend admirers since they are bullish when the market is in an uptrend and bearish when the market is in a downtrend. As a rule, they keep increasing their trades, until there is a reversal in price movement.

Large speculators are also leading participants in the futures market. So, their trading actions can lead the market to move radically. They make use of the moving average to take a trading decision.

Commercial traders (Hedgers)

Commercial traders, also known as hedgers, look to protect their trades against unpredicted price movements. Farmers or agricultural products who want to lower their risk in fast-moving commodities forms part of this group. Hedgers are mainly bearish at market tops, and they are bullish when marketing bottoms.

1 Comments

  1. Neophyta on May 29, 2021 at 11:57 PM

    There is no chart explaining How to Pick Tops and Bottoms With the COT Report.

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