Every trader will have their own views on the market.
“The market is in a bear market, the market is too bad!”
“Everything looks clear, and the market is now in a bull market.”
Every trader will explain from their own perspective why the market is operating in a certain way.

When trading, traders will express their own views on the transactions they conduct. But sometimes, no matter how confident the trader is, the market will run in a certain direction, and their transactions may end in failure.

Traders must realize that the overall market is a comprehensive display of the views of all market participants. Yes, all market participants.

This feeling expressed by all market participants is what we call market sentiment.

It is also the mainstream views of most participants in the market that determine the overall direction of the current market.

How to conduct market sentiment analysis

As a trader, analysis of market sentiment is an indispensable part of your trading work. Do economic indicators show that the market will rise? Are traders pessimistic about the economy? We cannot tell the market that we should develop in the situation we believe. All we can do is react to what is happening in the market.

It should be noted that the use of market sentiment analysis methods will not provide us with the exact entry and exit points for each transaction. But don’t despair because of it! Using market sentiment analysis can help you decide whether you should move with the market mainstream. Of course, you can always combine market sentiment analysis with technology and fundamental analysis methods to make better trading decisions.

In the stock and futures markets, traders can observe the trading volume as an indicator of sentiment in the stock and futures markets. If the price of a certain stock continues to rise, but the volume of transactions is declining, this may indicate that the market is overbought. Or, the volume of a continuously falling stock transaction suddenly rose sharply, which may indicate that market sentiment is turning from bearish to bullish.

Unfortunately, because the foreign exchange market is an over-the-counter transaction, or the foreign exchange market does not have a place to gather transactions. This means that every time a currency transaction volume is difficult for us to obtain easily.
Oops, oh no!

There is no tool to measure the trading volume of the foreign exchange market. How should traders measure market sentiment?

This is why the trader’s position report came into being!

Position report

The US Commodity Futures Trading Commission (CFTC) will publish a trader’s position report (COT) every Friday at around 2:30 PM Eastern Time.

Since the CFTC position report shows the net long and net short positions held by speculators and commercial traders, the position report is an important source for measuring the position of market participants in the market.
Later, we will introduce you to know these market participants. They are hedge funds, large institutional speculators, retail foreign exchange investors, etc. Just like the players of a team, each player has his unique characteristics and functions. By observing the behavior of these players, you will be able to predict in advance the possible changes in market sentiment.

You are probably asking yourself, “Why should I use data from the foreign exchange futures market?”

“Doesn’t the spot foreign exchange market report on measuring the position of currency traders?”

“I am a spot foreign exchange trader! The futures market has nothing to do with me.”

Remember, because the spot foreign exchange market is over-the-counter (OTC), the transaction does not go through a collective trading venue, such as the Chicago Board of Trade.

So, what is the closest way for us to understand market conditions and the movement of funds by large institutional investors?

You may have guessed it.

It is the position report of the trader from the futures market.