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.
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.
You will ask how you gauge the market sentiment then. You can accurately gauge the spot forex market sentiment by analyzing the Commitment of Traders (COT) report. What is COT report? The COT report provides the detailed positioning information about the futures market on a weekly basis.
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 COT reports are made available. The one is the futures only COT Report and the second is 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 and its implications for the spot forex market.
The data used in the COT report is three days old. Savvy currency traders spend their weekends going through the COT report. So the information in the COT report can be nonetheless useful to you. It hardly takes fifteen minutes to make a judgment. 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: 1) Commercial, 2) Non-commercial and 3) Non-reportable. The COT report tells you the long and short positions undertaken by the currency futures market 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 you and me also known as the retails traders.
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