As the CFTC position report is published once a week, it is more useful for long-term traders as an indicator of market sentiment.

Now you may ask:

“How do I convert so much data in the report into an indicator of market confidence to help me profit from trading?”

One way to use CFTC position reports to guide trading is to find net longs or net shorts in extreme conditions.

If there is an extreme situation of net longs or net shorts, this may imply that the market trend is about to reverse, because if everyone in the market is long a certain currency, then who else will buy it?

The answer is no one.

And if everyone in the market is shorting a certain currency, who will be the next one to short?

Of course, the answer is no one.

Make a similar analogy. Suppose you drive into a dead end and you cannot continue driving down. The only thing you can do is to return the car.

Let’s see what has happened to the EUR/USD since mid-2008. As you can see, from July to September, the euro/dollar fell steadily. As short positions held by non-commercial traders increase (the green line in the figure declines), the euro/dollar also declines. In mid-September, the EUR/USD net short position reached an extreme level of 45,650. Soon after, traders began to buy euro futures. At the same time, the euro/dollar quickly rose from the level near 1.2400 to the level near 1.4700!

In the following year, the euro futures position gradually changed from a net short position to a net long position. As expected by the market, the EUR/USD eventually hit a high of 1.5100. In early October 2009, euro futures net longs reached an extreme high of 51,000, and this trend subsequently reversed. Soon after, the euro/dollar also began to fall.

Isn’t it amazing! Just using the CFTC position report as a trading indicator, you have seized the two big market conditions from October 2008 to January 2009 and January 2009 and from November 2009 to March 2010.

The first extreme net position appeared in mid-September 2009. If you have already seen that speculative traders’ net short positions are at extreme levels, you may have bought EUR/USD around 1.2300, which may allow you to make a profit of nearly 2000 points in the next few months!

And if you find that the net long position in EUR/USD is also at an extreme level in September 2009, you are probably already selling EUR/USD, then this time your profit is about 1,500 points!

You are only using the CFTC position report as an indicator to study the market sentiment. If you grasp these two big market conditions, your cumulative profit will be 3,500 points. Unimaginable?