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

P1:a/b P2:c/d QC:e/f T1:g

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

Sentiment Indicators 77

WATCHING THE COMMERCIALS

Larry Williams, an expert on the COT reports, was the first (at least to my

knowledge) to recognize the importance of aligning with the commercials

at market extremes. In Trade Stocks and Commodities with the Insiders:

Secrets of the COT Report, Williams details his observations and explains

that the commercials are always the longest (most bullish) at market bot-

toms and the shortest (most bearish) at market tops (see Figures 5.2 to

5.4). Very long at market bottoms and very short at market tops. Now that

sounds like an excellent trading strategy!

Remember, commercial traders in the currency arena such as banks

and multinational corporations are hedgers and have enormously deep

pockets. With each tick higher in price, the hedger is selling in order to

hedge against a decline in price. The more price increases, the more the

hedger sells in order to obtain a higher average sell price. The result of

FIGURE 5.2 Commercial traders were extremely short British pounds at market

tops in October 1999, March 2005, and July 2007, and extremely long the currency

at the major market bottom in December 2005

Source: Chart created on TradeStation

R



, the flagship product of TradeStation Tech-

nologies, Inc.