Sentiment in the Forex Market: Indicators and Strategies to Profit from Crowd Behavior and Market Extremes

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c05 JWBK195-Saettele May 31, 2008 11:54 Printer: Yet to come

76 SENTIMENT IN THE FOREX MARKET

the dollar will fall relative to the Japanese yen or that the Japanese yen will

appreciate relative to the dollar. The first currency in the pair is referred t o

as the base currency, and the second currency in the pair is referred to as

the counter currency.

For example, the dollar is the base currency in USDJPY and the

Japanese yen is the counter currency. COT data shows positioning details

on the currency future itself, such as the euro or the Japanese yen. An ex-

treme bullish reading on JPY warns of a top in JPY, which correlates to a

bottom in the USDJPY. When the U.S. dollar is the base currency (USDJPY,

USDCHF, USDCAD), keep this specific detail in mind.

UNDERSTANDING THE DATA

The CFTC’s web site states that “The COT reports provide a breakdown of

each Tuesday’s open interest for markets in which 20 or more traders hold

positions equal to or above the reporting levels established by the CFTC.”

Who wouldn’t want to know this information? Remember that market tops

and bottoms are created by the errors of optimism and pessimism that are

referred to so often in this book. The COT report gives us actual numbers

so that we can quantify where the market is in the constant oscillation be-

tween optimism and pessimism and, as a result, gain a big-picture under-

standing of a specific ...