Some of the most popular and useful sentiment analysis indicators and reports include futures open interest, the Commitment of Traders (COT) report, and brokers’ position summaries.
Let’s first discuss futures open interest.
Futures open interest is used to indicate the number of active contracts (positions) that are currently open on any particular futures market and that have not been closed yet.
Now, you might be thinking, what is the use of looking at the futures market when I want to trade the forex market?
Well, because the forex market does not have a centralised exchange, or one physical location where all forex transactions take place, it makes it difficult to accurately determine how many forex positions there are globally at any particular point in time.
The futures market is different – because all transactions take place at physical exchanges, it is easier for each exchange to report on various metrics such as volume or open interest. The futures market also has currency futures, which closely mimic various currency pairs in the forex market.
Open interest is calculated by taking the total number of new contracts added to a futures market minus the total number of contracts that have been closed or settled.
For example, if 2,000 new contracts were added to the Australian dollar futures market on any given day, while 500 contracts were closed or settled, then the open interest would increase by 1,500 contracts.
Now, if you were to see the open interest of the Australian dollar futures increase by 1,500 contracts compared to a previous day in conjunction with a rise in prices, then as a forex trader, this might indicate that the AUD/USD will likely move higher.
To find more information about futures open interest data, you can head over to the websites of the Chicago Mercantile Exchange Group (CME) or the Intercontinental Exchange (ICE)
Next, we will discuss the Commitment of Traders (COT) report, which is another useful forex sentiment analysis tool that can be used in your analysis.
The Commodity Futures Trading Commission (CFTC) releases a weekly Commitment of Traders report. This report tracks the amount of long and short positions taken by various groups of speculators in the futures markets.
What makes the COT report different from the futures open interest data is that it shows both the amount of long and short positions held by these groups of speculators, whereas open interest data only reports on the total amount of contracts added or closed.
The different groups of speculators are classified as non-commercial (large speculators), commercial hedgers and small traders.
Forex traders mostly pay special attention to what the COT report reveals about the positions of the non-commercial or large speculators group. This group is known to be composed of fierce trend followers. It predominantly consists of speculators who have no interest in using the currency futures market for hedging purposes.
Because of this, you will often see large speculators add more contracts to their long positions during a bullish trend or add more contracts to their short positions during a downtrend.
Another way that traders interpret the sentiment of this group is to watch for signs that their overall long or short positions have reached extreme conditions – meaning that they may start taking profit on their positions, which could result in a trend reversal.
To find more information on the weekly COT report, you can visit the CFTC’s website to view the data in tabular format or visit a website such as Barchart.com to view the data in graphical format.
Another source that can be used for forex sentiment analysis are broker position summary reports.
Many forex brokers will keep an updated position summary of all their clients’ trading activity, including the percentage of long and short positions and the overall changes in these positions over time.
This information can be useful in gauging market sentiment, as it can give an indication of how bullish or bearish traders are feeling.
One important consideration that needs to be taken into account with these kinds of reports is that it only reflects the sentiment of all the traders who have accounts with a particular broker and does not reflect the sentiment of the entire forex market as a whole.