Trading COT Open Interest as a 'Pseudo Volume' Indicator

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Introduction

As suggested in our last lesson, Trading Market Sentiment - COT Report, this futures report allows us a long term view of what positions traders are holding. This being the case, it can be utilised effectively as a 'pseudo volume' indicator and as a market reversal indicator in the forex markets. We'll look at both in the next two lessons.

Open interest analysis is not uncommon among those who trade futures, but it is a different story for those who trade spot Forex. Module 9 What's Forex, Reading Quotes & USD Index explains the difference in the Forex markets. One of the most important points to note about the spot forex market is that information pertaining to open interest and volume is not available because transactions are carried out over-the-counter, and not through exchanges. As a result, there is no record of all the transactions that have taken place or are taking place in all the "back alleys". Without open interest and volume as vital indicators of the strength of spot price moves, the next best thing would be to examine the open interest data on currency futures.

One of the many differences between spot forex and currency futures lies in their quoting convention. In the currency futures market, currency futures are mostly quoted as the foreign currency directly against the U.S. dollar. For example, Swiss francs are quoted versus the U.S. dollar in futures (CHF/USD), unlike the USD/CHF notation in the spot forex market. Therefore, if the Swiss franc depreciates in value against the U.S. dollar, USD/CHF will rise, and the Swiss franc futures will decline. On the other hand, EUR/USD in spot forex is quoted in the same manner as euro futures, so if the euro appreciates in value, euro futures will rise as the EUR/USD goes up.

The spot and futures prices of a currency (not currency pair) tend to move in tandem; when either the spot or futures price of a currency rises, the other also tends to rise, and when either falls, the other also tends to fall. For example, if the GBP futures price goes up, spot GBP/USD goes up (because GBP gains in strength). However, if the CHF futures price goes up, spot USD/CHF goes down (because CHF gains in strength), as both the spot and futures prices of CHF move in tandem.

Trading with COT Open Interest as a 'Pseudo Volume' Indicator

An exceptionally useful and prudent use of the COT report is regarding it as a 'volume complement' to the price studies generated by conventional technical analysis. The trader acts when a technical signal is confirmed by increasing open interest in the COT report. For conviction in the move we would expect a corresponding rise in open interest and for lack of conviction, a corresponding fall.    

To measure open interest historically we can use timingcharts.com for automatic charting or we need to open the historical data file supplied by The CFTC here and make our own charts.  We'll discuss the manual charting option first to get a feel for where the data comes from.

We're interested in The 'Traders in Financial Futures; Futures Only Report'. Once open we're only interested in the 'open interest all' column from our specific market, which must then be extracted and charted manually to get a sense of market conviction on the trend and therefore confirmation of the move.  

The below chart shows a Euro futures chart from timingcharts.com super imposed above a Euro open interest chart derived from data extracted from the CFTC historical data file. Look how open interest increases confirming the up trend on the left and the down trend on the right.

Euro Futures chart superimposed over Open Interest Chart

Data from 'Traders in Financial Futures; Futures Only Report'

NB. Above, I've shown you how to extract the data from The COT report and use it as a pseudo volume indicator.  Alternatively and somewhat easier, timingcharts.com can chart the total open interest for you.  Under Chart settings > COT you'll see a report field.  Click on open interest to get the same results as above.

Getting more up to date Daily Data

Alternatively, The CME Group publishes DAILY Open Interest reports based on the last periods close for ALL it's futures markets (Globex). The Link is here - https://www.cmegroup.com/trading/fx/. These charts are obviously more useful to shorter term traders.  Alternatively https://futures.tradingcharts.com/chart/E6/ also chart open interest.  Their data is taken from The CME.

To Sum Up

Think of open interest as having the same psychology as volume, although not exactly the same.  As volume increases on a trend, this is confirmation that the trend has a good chance of continuing - for forex read volume as 'open interest'.  Remember large volume signifies there is significant interest in the market at a certain price and low volume signifies disinterest in buying or selling.  It's maybe a good idea to go over our Volume lesson again to gauge how changes in volume affect volatility and psychology.

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Introduction

As suggested in our last lesson, Trading Market Sentiment - COT Report, this futures report allows us a long term view of what positions traders are holding. This being the case, it can be utilised effectively as a 'pseudo volume' indicator and as a market reversal indicator in the forex markets. We'll look at both in the next two lessons.

Open interest analysis is not uncommon among those who trade futures, but it is a different story for those who trade spot Forex. Module 9 What's Forex, Reading Quotes & USD Index explains the difference in the Forex markets. One of the most important points to note about the spot forex market is that information pertaining to open interest and volume is not available because transactions are carried out over-the-counter, and not through exchanges. As a result, there is no record of all the transactions that have taken place or are taking place in all the "back alleys". Without open interest and volume as vital indicators of the strength of spot price moves, the next best thing would be to examine the open interest data on currency futures.

One of the many differences between spot forex and currency futures lies in their quoting convention. In the currency futures market, currency futures are mostly quoted as the foreign currency directly against the U.S. dollar. For example, Swiss francs are quoted versus the U.S. dollar in futures (CHF/USD), unlike the USD/CHF notation in the spot forex market. Therefore, if the Swiss franc depreciates in value against the U.S. dollar, USD/CHF will rise, and the Swiss franc futures will decline. On the other hand, EUR/USD in spot forex is quoted in the same manner as euro futures, so if the euro appreciates in value, euro futures will rise as the EUR/USD goes up.

The spot and futures prices of a currency (not currency pair) tend to move in tandem; when either the spot or futures price of a currency rises, the other also tends to rise, and when either falls, the other also tends to fall. For example, if the GBP futures price goes up, spot GBP/USD goes up (because GBP gains in strength). However, if the CHF futures price goes up, spot USD/CHF goes down (because CHF gains in strength), as both the spot and futures prices of CHF move in tandem.

Trading with COT Open Interest as a 'Pseudo Volume' Indicator

An exceptionally useful and prudent use of the COT report is regarding it as a 'volume complement' to the price studies generated by conventional technical analysis. The trader acts when a technical signal is confirmed by increasing open interest in the COT report. For conviction in the move we would expect a corresponding rise in open interest and for lack of conviction, a corresponding fall.    

To measure open interest historically we can use timingcharts.com for automatic charting or we need to open the historical data file supplied by The CFTC here and make our own charts.  We'll discuss the manual charting option first to get a feel for where the data comes from.

We're interested in The 'Traders in Financial Futures; Futures Only Report'. Once open we're only interested in the 'open interest all' column from our specific market, which must then be extracted and charted manually to get a sense of market conviction on the trend and therefore confirmation of the move.  

The below chart shows a Euro futures chart from timingcharts.com super imposed above a Euro open interest chart derived from data extracted from the CFTC historical data file. Look how open interest increases confirming the up trend on the left and the down trend on the right.

Euro Futures chart superimposed over Open Interest Chart

Data from 'Traders in Financial Futures; Futures Only Report'

NB. Above, I've shown you how to extract the data from The COT report and use it as a pseudo volume indicator.  Alternatively and somewhat easier, timingcharts.com can chart the total open interest for you.  Under Chart settings > COT you'll see a report field.  Click on open interest to get the same results as above.

Getting more up to date Daily Data

Alternatively, The CME Group publishes DAILY Open Interest reports based on the last periods close for ALL it's futures markets (Globex). The Link is here - http://www.cmegroup.com/trading/fx/. These charts are obviously more useful to shorter term traders.  Alternatively http://futures.tradingcharts.com/chart/E6/ also chart open interest.  Their data is taken from The CME.

To Sum Up

Think of open interest as having the same psychology as volume, although not exactly the same.  As volume increases on a trend, this is confirmation that the trend has a good chance of continuing - for forex read volume as 'open interest'.  Remember large volume signifies there is significant interest in the market at a certain price and low volume signifies disinterest in buying or selling.  It's maybe a good idea to go over our Volume lesson again to gauge how changes in volume affect volatility and psychology.

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