Forex Trading Tutorial: Using COT to on the market uncover profitable opportunities
Ok, so I introduced you to different tools to uncover the sentiment and imbalances in the market so that you get the direction right for your trades. Lets cover one of them in more detail in this forex trading tutorial: the COT report data (Commitments of Trader report). This positioning data allows you to make sure that you are following the correct long term direction and understand when a change in direction of price action is just a small pullback or actually the beginning of a new trend. Getting clear on this is essential to make money trading forex
Lets take a look at a typical COT chart from TimingCharts If you notice, below the forex price chart, there are lines with three different colors. The blue line represents the net number of commercial contracts in the market. The green line represents the net number of large speculator contracts in the market. The commercial traders are the big import/export companies that need to exchange currencies on a regular basis to do their business. These are companies such as British Airways, who needs to buy planes from the US and Europe and pay in Dollars and Euros by exchanging British Pounds. The large speculators are banks and hedge funds who are speculating on how the relative economics between two countries are going to play out and thus what the exchange rate is going to look like in the near future. The difference between how long and how short the commercials and speculators are is the net positioning of the market (displayed in red) and is usually indicative of the current momentum and sentiment of the market. Your job is to align yourself with this and other driving forces to maximize your ability to make money trading forex.
Euro price chart with COT positioning data beneath (click to enlarge) Image courtesy of TimingCharts.com
Notice how theres a zero line in the middle. When net positioning is above the zero line and especially if its climbing, buying interest (i.e. postive sentiment) usually exists for the currency. If on the other hand, its below the zero line (especially when it just crosses), sentiment is bearish on the currency. Your goal for positioning yourself with sentiment is to buy when net positioning (a.k.a. open interest) is well above the zero line and preferably even climbing, and have a selling bias when the opposite occurs.
Notice that when the red line was well above the zero line (Sep-Nov), the Euro climbed strongly on positive sentiment. Then the net positioning started to become less and less long as it proceeded toward the zero line.
Then, in the month of November, the Euro tried to make a new high, yet COT was flat and even slightly decreasing. This divergence signifies a negative imbalance. Remember, to make money trading forex, you can look to trade in the same direction as sentiment, but even better is if you spot an imbalance that drives a powerful, sustained move as seen in the above example.
In the following month, net long positioning (in red) started unwinding fast as it moved toward zero and then became negative by January, at which point the Euro declined sharply in value against the Dollar. This was clearly reflective of negative sentiment. Admittedly the timing wasnt perfect as price started falling before net positioning went negative, but it was already declining, and thats why we have other methods of gauging sentiment to complement it (such as currency strength/weakness and price reaction to scheduled news events). I just wanted to show you how things really are, instead of just painting idealistic pictures!
Now you have learned in this forex trading tutorial how to use COT to gauge whether sentiment is positive or negative and if price is ready to make a move or reverse its trend due to an imbalance ready to be unwound.
Lets take a look at a typical COT chart from TimingCharts If you notice, below the forex price chart, there are lines with three different colors. The blue line represents the net number of commercial contracts in the market. The green line represents the net number of large speculator contracts in the market. The commercial traders are the big import/export companies that need to exchange currencies on a regular basis to do their business. These are companies such as British Airways, who needs to buy planes from the US and Europe and pay in Dollars and Euros by exchanging British Pounds. The large speculators are banks and hedge funds who are speculating on how the relative economics between two countries are going to play out and thus what the exchange rate is going to look like in the near future. The difference between how long and how short the commercials and speculators are is the net positioning of the market (displayed in red) and is usually indicative of the current momentum and sentiment of the market. Your job is to align yourself with this and other driving forces to maximize your ability to make money trading forex.
Euro price chart with COT positioning data beneath (click to enlarge) Image courtesy of TimingCharts.com
Notice how theres a zero line in the middle. When net positioning is above the zero line and especially if its climbing, buying interest (i.e. postive sentiment) usually exists for the currency. If on the other hand, its below the zero line (especially when it just crosses), sentiment is bearish on the currency. Your goal for positioning yourself with sentiment is to buy when net positioning (a.k.a. open interest) is well above the zero line and preferably even climbing, and have a selling bias when the opposite occurs.
Notice that when the red line was well above the zero line (Sep-Nov), the Euro climbed strongly on positive sentiment. Then the net positioning started to become less and less long as it proceeded toward the zero line.
Then, in the month of November, the Euro tried to make a new high, yet COT was flat and even slightly decreasing. This divergence signifies a negative imbalance. Remember, to make money trading forex, you can look to trade in the same direction as sentiment, but even better is if you spot an imbalance that drives a powerful, sustained move as seen in the above example.
In the following month, net long positioning (in red) started unwinding fast as it moved toward zero and then became negative by January, at which point the Euro declined sharply in value against the Dollar. This was clearly reflective of negative sentiment. Admittedly the timing wasnt perfect as price started falling before net positioning went negative, but it was already declining, and thats why we have other methods of gauging sentiment to complement it (such as currency strength/weakness and price reaction to scheduled news events). I just wanted to show you how things really are, instead of just painting idealistic pictures!
Now you have learned in this forex trading tutorial how to use COT to gauge whether sentiment is positive or negative and if price is ready to make a move or reverse its trend due to an imbalance ready to be unwound.
Euro price chart with COT positioning data beneath (click to enlarge) Image courtesy of TimingCharts.com
Notice that when the red line was well above the zero line (Sep-Nov), the Euro climbed strongly on positive sentiment. Then the net positioning started to become less and less long as it proceeded toward the zero line.
Then, in the month of November, the Euro tried to make a new high, yet COT was flat and even slightly decreasing. This divergence signifies a negative imbalance. Remember, to make money trading forex, you can look to trade in the same direction as sentiment, but even better is if you spot an imbalance that drives a powerful, sustained move as seen in the above example.
In the following month, net long positioning (in red) started unwinding fast as it moved toward zero and then became negative by January, at which point the Euro declined sharply in value against the Dollar. This was clearly reflective of negative sentiment. Admittedly the timing wasnt perfect as price started falling before net positioning went negative, but it was already declining, and thats why we have other methods of gauging sentiment to complement it (such as currency strength/weakness and price reaction to scheduled news events). I just wanted to show you how things really are, instead of just painting idealistic pictures!
Now you have learned in this forex trading tutorial how to use COT to gauge whether sentiment is positive or negative and if price is ready to make a move or reverse its trend due to an imbalance ready to be unwound.
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