Ways of Measuring Market Sentiment
The mood of the market depends mainly on what the majority of traders think about
the current market situation. But how can you get an idea of the overall sentiment
of the market? You can do so by reading reports by analysts and financial
journalists in news wires or by visiting online trading forums to see what other
traders are discussing. However, these ways of getting a feel of the current market
sentiment are not too accurate; you may think that other traders are in a buying or
selling mood, but that may not be what is really happening in reality. Here are some
:of the more effective ways of gauging market sentiment
1The Commitment of Traders (COT) report
2The market’s reactions to news releases
These are explained in more details below
1Commitment Of Traders (COT) report
?What is the COT
The COT report provides traders with detailed positioning information about the
futures market, and is, in my opinion, one of the most underrated tools that forex
traders can make use of to enhance their trading performance
The report is compiled and released weekly by the Commodity Futures Trading
Commission (CFTC) in the United States every Friday at 15:30 Eastern Time, and
records open interest information about the futures market based on the previous
Tuesday. Anyone can access the COT report for free on the CFTC website
(www.cftc.gov/cftc/cftccotreports.htm)
There are basically two types of reports available: the futures-only COT report and
the futures-and-options-combined COT report. I usually just access the futuresonly
report for a glimpse of what has happened in the futures dimension of the
forex market. In order to get through to the currency futures data, you have to wade
past other commodities like milk, feeder cattle and so on, so a little patience is
required
Even though the data arrives three days late, the information nonetheless can be
helpful since many traders spend their weekend analyzing the COT report. The time
lag between reporting and release is the main handicap of the COT data, but despite
this limitation, you can still use it as a sentiment tool
(Figure 5.3 shows a page from the December 19, 2006, COT report (short format
displaying data for the Chicago Mercantile Exchange’s Euro FX futures contract
You can see the long and short positions held by traders in each of the three main
categories defined by the CFTC, as explained below
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