Forex Major Pairs – Commitment of Traders (COT Analysis)
What is a Forex Major Pair?
When it comes to trading forex and currencies there’s a word like major and minor pairs. In this post, we’ll be discussing the major pairs in the forex market. These will be EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
The interesting thing about major currency pairs I’ve outlined above is that they’re in the top 10 economies in the world also known as the G10 currency group. These currencies, therefore, trade significant volumes in the markets for economic transactions such as imports and exports. For this same reason, speculative traders like you and I also try to take a piece of the pie by trading which direction it’s likely to go. Up or down!
One of the biggest speculators in the forex market are Hedge funds they’re like the coca cola of the fizzy drink world, they’ve got the big bucks. Which is why we’re going to be going over sentiment analysis on hedge funds to see how they’re positioned for the future, what to expect and what to look out for to make sure we’re trading profitably.
Key Points
We’ve identified the four major currency pairs EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
Major currencies are the most heavily traded pairs in the world.
Commodity floating currency pairs like USD/CAD, AUD/USD and NZD/USD are also traded frequently but are more suspect to volatility due to dependency on trade.
The EUR/USD is the most heavily traded currency pair in the world, it’s popular among speculators but due to the volume it takes much more money to move!
Hedge funds trade currencies to make money on future exchange rates, they do this by forecasting using fundamentals, sentiment and price.
The Commitment of Traders – COT Report Forex Major Pair Analysis
Throughout the rest of the analysis post I’ll be discussing what you want to be looking out for when trading and using the Commitment of Traders COT report analysis. You’ll want to understand first how to create the Commitment of Traders COT Hedge Fund Indicator, click that link to see how to make the indicator as it’ll be the core foundations of what I’m going to be talking about.
Just to let you know again we’ll be doing the COT sentiment analysis on a couple major pairs and these will be EUR/USD and USD/JPY. So, let’s go ahead and start with EUR/USD.
EURUSD Commitment of Traders Forex Analysis
The Euro and the US Dollar are the most traded currencies in the world which have the largest globally trade volume. Many traders prefer to trade this currency pair because of the lower volatility and tighter spreads. Not many events are going to cause huge spikes on this pair that’s for sure!
The main reason they’re the most traded currencies is because the Euro is the currency traded in the European union and the US dollar is used in various transactions across the world as it’s the reserve currency of the world.
What we’re going to do now is start comparing the EURUSD exchange rate against Hedge fund positions in the market.
What we have here is all the COT data for 2020 and there’s a clear trend going on with the data and correlations we can come up with. If you’ve read and watched our COT analysis then you’ll understand that when the sentiment is below 0 the hedge funds are selling the currency and if it’s above 0, they’re buying it, simples.
What we want to do is make sure our trade ideas and fundamental direction is on the correct side of the trade. Fundamental analysis will give us the strongest probability for the direction of a currency, we work out the fundamental strength by checking the Macro currency strength meter and conducting some relative analysis afterwards. This is how you really make money trading forex, if you’re unsure of how the whole process works we’ve got a simple explanation here.
Enough of the process, what does the data say? Well, it’s clear that between January and March hedge funds were shorting EURUSD. Throughout that period the EURUSD exchange rate was choppy to the downside depreciating from a high of around 1.12 all the way down to 1.08. The fundamentals and COT position would have netted us some nice profits during that period early this year.
However, what’s happened since then? Hedge funds have started to sell the US Dollar with a higher open interest than EUR. This means we’re flat in the market and we’re not really looking to enter any positions because the sentiment doesn’t look great. You don’t want to lose your hard-earned cash, do you? Waiting for the COT sentiment is like watching the sky and waiting for the right time to get a cool picture. In trading waiting and being patient will net you those large trends and stop you from getting stopped out of trades more often!
You can clearly identify that the orange area on the COT indicator was in the selling region meaning the hedge funds were selling the dollar throughout the rest of 2020. Since then the EURUSD exchange rate has been increasing significantly, that’s where fundamentals can come in really handy. They give you the early indication that the EUR could be stronger than USD before hedge fund sentiment have to actually declare their positions!
The overall future things to look out for will be to make sure your fundamental outlook matches the direction of hedge fund sentiment, if it’s completely opposite it’s a good management tool to not take that trade. If the market sentiment is both in the direction, see which one has more positions (more open interest in that direction). E.g. if above because the last few months the hedge funds have been selling the USD way more than the euro, we can assume that a long idea is more likely than a short!
Let’s go ahead and take a look at the other currency pairs and their themes.
USDJPY Commitment of Traders Forex Analysis
What we’re looking at here is the USDJPY in the red line, USD hedge fund sentiment in blue and JPY sentiment in orange. We’re going to use the same analysis to see what’s been going on over the past year since the start of an eventful 2020!
What we had between January and march of 2020 was hedge funds longing USDJPY respectively. You can clearly see the blue above the 0 mark and the orange below the 0 mark meaning long USDJPY. But you can see that it was very volatile, there were 2 great turning points in that period to capture a long idea, but you could have been stopped out a lot during that period.
That’s were fundamental analysis comes into play. It provides us the higher probability times of turning points and also trends. So, we would have made sure that our fundamentals in these periods were telling us to long before we took the long trades if not then we keep an eye sit back and watch it, just like when you’re on the beach watching the sunset.
Throughout the rest of the year until now, hedge funds have been selling the USD at a higher open interest than JPY. This means overall the USD should be weaker than the JPY, which is shown in the red line following a nice downtrend. Ideally, you’d want to surf the trend all the way down until the COT positioning says otherwise.
Little bit of a different analysis this week as on a fundamental level were seeing quite a lot of strength coming up so trade ideas are limited!
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