Understanding The Market Sentiment (Part IV)

Posted by Ahmad Hassam

July 29, 2009

by Ahmad Hassam

What are the ways of measuring the market sentiment? The mood of the market depends on what the majority of the traders think about the current market situation. How do you get an idea of the overall market sentiment? By reading reports of analyst and financial journalist in the news wires! You can also join online trading forums to see what other traders are thinking.

However, this way of getting the feel of the market sentiment is not very accurate. You may think that the other traders are in a buying or selling mood but that may not be what is really happening in reality.

What is the COT report? The COT report provides the detailed positioning information about the futures market on a weekly basis. You will ask how we gauge the market sentiment. You can accurately gauge the spot forex market sentiment by analyzing the Commitment of Traders (COT) report.

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.

Basically two types of reports are available: 1) The Futures only COT Report and 2) The Futures and Options combined COT Report. A look at the futures only COT report will give you the glimpse of what has happened in the futures currency market.

The data arrives three days later. Many traders spend their weekends going through the COT report. So the information in the COT report can be nonetheless useful to you. 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.

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: The commercial category consists of market participants who use the futures contract for hedging purposes. These commercial participants are mostly exporters and importers in the market who are hedging against the currency fluctuations in the next few months. For example, suppose Japanese company Toyota expects to receive $500 million worth of sales from the US market in the next quarter.

Toyota Company will short $500 millions in JPY currency futures in order to hedge against the USD decline. Similarly if the US pharmaceutical company is looking to exports $50 million worth of drugs to the Japanese market in the next quarter, it will long $50 million JPY currency futures.

Non-commercial: The non-commercial category consists of large speculators. Hedge funds, banks, institutional investors and so on are included in this category. These are the major players who speculate in currency futures for quick capital gains.

Non-reportable: This category comprises small speculators like retails traders.

About the Author:

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Get Netpicks Forex Signals Free. Learn Forex Trading!

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