What does the market feel on a given day? Well, the market is not an actual being in and of itself, but it is made up of a collection of traders who are all working to try to figure out where prices are or should be going. Thus, their actions are what actually make up the market sentiment.
Bears and Bulls
The two terms that you will hear about market sentiment quite frequently are that there is a “bear market” or a “bull market”. By this point, you should know what all of this means. The good news is that you can learn it all when you take the time to learn about what people are talking about.
Bull markets are markets in which the sentiment is positive. In these markets, the asset that one is looking at is likely to increase in value.
Bear markets are markets in which the sentiment is negative. In these markets, the asset that one is looking at is likely to decrease in value.
Responding to the Market Sentiment
Taking a sentiment-based approach to trading is a great way to decide if you want to go with the flow or if you are ready to take a contrarian position compared to where everyone else is now.
The most important thing to remember is that you need to make sure you are looking at how the market is reacting to the newest pieces of information that are flowing into the market at this time. Volume is what people tend to look at when trading on sentiment in the stock and/or bond market. Unfortunately, that is not going to work for you when trading in the Forex markets.
Volume reports like this don’t exist for the Forex markets. Instead, you will need to look at something called the Commitment of Traders (COT) report. We will cover this report in more detail later. The bottom line is that you need to look to the tools that you do have available in order to make your decisions. In this case, the COT report is the way to go.
What is the Commitment of Traders Report?
The Commitment of Traders report or COT report is an important fundamental piece of data that traders use to make decisions about how they will trade in the markets.
Positioning
The COT is released every Friday at 3:30 ET and reflects the commitments of traders for the prior Tuesday. The COT provides a breakdown of aggregate positions held by three different types of traders: “Commercial traders” (in forex, typically hedgers) “Non-commercial traders” (typically, large speculators) and Small – Retail clients.
The Commitment of Traders report is a useful resource because it outlines how much commercial and speculative traders are net long or net short on certain currencies contained within. What this means is that the average individual who views this report may look over it and determine for themselves if there is value in getting short or long a specific position that they have been eyeing.
There are many different types of players in the market including hedgers, large speculators, and retail traders. Knowing where each group of traders is playing their bets may give you a better idea about how to place your own.
The Futures Market
The Commitment of Traders Report is a Great Starting Point
You might think that the futures market doesn’t pertain to the trading that you do because you are a trader in the currency markets. However, the reality is that the futures market is the best gauge that we currently have for how the largest traders in any market are behaving. It is where you can pull some information that is relevant to the positioning of the largest traders out there.
All traders should at least examine the COT report to see where other traders stand. It is important to try to gauge the behaviours of other traders to try to gain a little more insight into the way that the market is likely to behave going forward. Is it necessarily going to tell you everything? No, but it can help you get a good start on what you may need to do.
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