At FXDB, we fervently believe that sentiment drives the markets more than anything else. Bernard Baruch, one of the most successful financiers and stock market investors famously said that 'all economic movements, by their very nature, are motivated by crowd psychology'. Indeed, understanding the psychological state of the market is critical for successful trading. However, the forex market is an OTC market, where trades do not pass through a centralised exchange. Therefore, there are no volume indicators to analyse. The only way to get a sense of crowd behavior in the FX market is to analyse the data from the futures market.
The U.S. Commodity Futures Trading Commission (CFTC) publishes weekly Commitments of Traders (COT) reports. These reports detail the positioning of traders in the various futures markets, including forex. We analyse their figures on a weekly basis and calculate three key indicators that help us gauge the psychological state of the market.
- Composite combines speculative and commercial positioning to show the net-number of contracts. Composite indicator correlates positively with the exchange rate, but does not show the extremes in sentiment.
- 3-Year Index uses percentiles to indicate how extreme the net positioning is relative to the past 3 years. A reading of 100 signifies a bullish sentiment extreme. A reading of 0 signifies a bearish sentiment extreme.
- 3-Year Index (AOI) goes further and adjusts net positioning for the latest Open Interest. Because the markets are constantly evolving and change in size over time, unadjusted net positioning figures may be somewhat misleading. Therefore, it is assumed that 3-Year Index (AOI) is the most accurate indicator of market sentiment. A reading of 100 signifies a bullish sentiment extreme. A reading of 0 signifies a bearish sentiment extreme.
The Primary Chart shows historical and the latest available sentiment indicators for twelve currencies. You can select any number of currencies you wish to compare, but only one out of three indicators: Composite, 3-Year Index or 3-Year Index (AOI).
The Ranking Chart shows the latest results (for the selected currencies and a selected indicator), starting from the “most overbought” currency and ending with the “most oversold” currency.
CFTC does not release the data for all currencies. The data is only available for the following twelve currencies: Australian dollar (AUD), Brazilian real (BRL), Canadian dollar (CAD), Swiss franc (CHF), Euro (EUR), Pound Sterling (GBP), Japanese yen (JPY), Mexican peso (MXN), New Zealand dollar (NZD), Russian rouble (RUB), Turkish lira (TRY), US dollar (USD) and South African rand (ZAR).
Data is reviewed and updated every Friday (or Saturday).