News
Trading

Advanced
Tools

News trading is a very useful tool. Important announcements on economic matters with respect to countries like the United States usually have a strong impact on the price during a session. Sometimes you can see big price movements, 50, 100 or 200 pips moving at a certain point in the session due to these announcements.

Why is news
trading important?

News trading is very useful for your trading, whether you decide to combine it with technical analysis or apply it directly. News from large economies usually generates strong movements in the short term in the market (in some cases even in the long term). Some traders may have strategies specifically designed to take advantage of those sudden price changes or that as part of their analysis.

Where can I see the publication of the news?

On the internet there are many websites where you can check the news calendars. There are news from the most important economies, the impact they will have, the time and day where they will be published and much more. In the image we see the news calendar of a portal called ForexFactory.

There are many news to take into account, for example, for the USA you can see reports publications on:

And so many others. Countries like New Zealand, Australia, China, Japan, Germany and many other major economies publish their reports. Some news tend to have a greater impact in one country than in another, for example, the US non-farm payrolls have an important weight on the dollar, while the development of the Chinese economy and its imports usually impact the AUD and the NZD.

Depending on global economic conditions, some reports will have more or less impact on the currency. For example, changes in the interest rate in periods of uncertainty or economic crisis.

Market
Sentiment

Market sentiment represents the accumulated view that investors or traders have of a particular asset or market. It represents the psychology of the masses, that is, what traders expect a particular asset to do.

For example, a rise in the price of a currency pair indicates a bullish market sentiment, a fall in prices indicates a bearish market sentiment.

In the case of the Forex market, it is difficult to measure market sentiment using technical indicators such as volume (which is often used in the share market), since there is no centralized market. Likewise, the volume indicator usually shows only the volume traded between the broker’s clients and liquidity providers offered by your platform.

To get an idea of market sentiment we can turn to the COT report that we will explain below.

Commitment of Traders Report (COT)

The Commodity Futures Trading Commission is responsible for publishing the COT or Commitment of Traders report on Fridays. What is interesting about this report? It shows a measurement of the long and short positions that were executed in the futures market.

It is a very useful tool that although it does not represent the accumulated of all traders in the world, it does show us the sentiment of the market of the large agents (for example, large investment banks), since they are obliged to provide this information to the government. . Seeing how the big players work and what they expect is important, it is their plays that move the market.

Here we can see a COT report for the Canadian dollar updated as of July 8, 2016.

The report is short and simple, here we will see what each category means:

Non-commercial:

Represents individual traders, hedge funds and large institutions that use futures for speculative purposes.

Commercial: 

Represents large companies involved in the production, processing or marketing of a commodity and those that use futures for hedging.

Long: 

It is the number of long position contracts that have been reported to the Commodity Futures Trading Commission (CFTC).

Short: 

It is the number of short position contracts that have been reported to the Commodity Futures Trading Commission (CFTC).

Open Interest: 

Represents the number of futures or options contracts that have not been traded, delivered or exercised.

Non-reportable positions: 

Represents the number of open interest positions taken by traders who do not need to report or notify the CFTC.

Number of traders: 

Represents the number of traders who are required to report their positions to the CFTC.

Reportable Positions: 

Represents the number of positions in futures and options required to be reported to the CFTC.

How to use the COT Report?

We have already seen what are the elements that make up the COT, however, the important thing is to know how to use this information. Since the COT is published every Friday, it can be more useful for long or medium-term traders, however, it will help you better understand the macro trend of a market.

There are three important things that the COT report gives us:

Changes in Futures Market Position

It is important that you know that in the Futures market, currency pairs are not represented in the same way. For example, the Swiss franc futures are understood under the nomenclature of CHF/USD.

What does this mean?

That if the Swiss franc futures market has a bearish sentiment, in the FX market this sentiment would be bullish for the USD/CHF.

In the image we can see two important graphs, the first represents the price of USDCHF in a line graph in a weekly time frame (remember that the reports are published every Friday). The second graph represents the net non-commercial positions on the future of CHF.

When the net of non-trade positions is above the zero line it means that there is a bullish sentiment regarding the future of the CHF, that is, a bearish sentiment for the USDCHF in the FX market.

When the net of non-commercials positions is below the zero line it means that there is a bearish sentiment regarding the future of the CHF, that is, a bullish sentiment for the USDCHF in the FX market.

You can see that the positions of the CHF in the futures market are a good reflection of the price action of the USDCHF pair. We see spikes in bearish sentiment in the futures market that coincide almost exactly with spikes in bullish sentiment in the FX market.

Following the behaviour of the big players can be very useful to take advantage of potential trends.

Extreme Positions

Extreme positions in the futures market are a good sign to identify possible trend changes in the FX market.

In the chart we can see that there are some extreme long positions on the future of the GBP. These extremes have matched very precisely with the highs generated by the price of GBP/USD in the FX market.

As we can see, after these extremes there have been trend changes in the market. For example, after the first extreme the market had a fall of more than 900 pips, after the second extreme the FX market fell about 700 pips and after the last extreme the market went down by more than 1000 pips.

Why does all this happen?

These trend changes occur because these extreme points represent a large concentration of speculators in one direction, it is as if everyone has already taken a position, there is no one else left in the market. For example, here we see that there is a large concentration of speculators going long on the GBP, everyone who wanted to go long has already taken their position and there is no one else left in the market. The logical thing is that the upward momentum begins to lose steam and prices begin to reverse (there are no more buyers who can strengthen the uptrend).

Changes in open interest

An additional tool that the COT report provides us is changes in open interest. Changes in open interest can be used to determine the strength of a trend, ups can indicate greater strength and downs may be depletion.

If we see that a market has had an uptrend along with increases in open interest and suddenly we see that the open interest begins to decrease, this may be a sign of a weakening of the trend.

We can see a chart of the EURUSD in the FX market and a chart of Open Interest. We can see that the increases in open interest have coincided with strong impulses from a trend (in this case bullish). We can observe up to 3 clear points where the Open Interest made highs that coincide with highs of the EURUSD in the FX market.