Should We Always Sell Currencies That Have A Big Net Long COT Position?

Never trade off CoT information alone. Always factor in the baseline fundamental bias for each currency. CoT data helps you understand how priced in a particular bias is.
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Commitments Of Traders – CoT – Report Data

We just have a quick question here from Alia asking us, “Why should we sell a currency, for example, the Euro, when it has the biggest net long position in the market.”

Alia, first of all, thanks for the question. Looking at the question, the most important thing to first mention here is that we never use COT data as the basis or the reason for taking any trades that we plan to take or want to take.

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The reason for every trade we take should always be based on our fundamental analysis for the currencies that we want to trade. When the COT data becomes helpful is when we can use it in conjunction with our regular analysis. We can either use the COT data or positioning as a way of confirming our bias, for example.

Let’s say we have a bullish bias on the Yen. We would expect to see a net long position in the market for the currency. If there isn’t yet a net long position, it means that there’s still plenty of room to the upside for that currency to move in line with that bias.

Then we can also look to the COT data for potential on winding opportunities. To your question with regards to the Euro as a good example, let’s just quickly take a look at this week’s COT report. We can see that currently the Euro has the biggest net long position among the major currencies.

If we quickly pop over to the Financial Source Terminal to our Currency Research section, we can see that from the Fundamental Strength meter that currently the Euro is our most bearish position right now. With the net long position being so big, there is lots of room to the downside for the Euro.

So looking at the COT data, we would interpret this as the market being incorrectly priced right now for the Euro being way too bullish in terms of positioning with regards to the current bias.

When we quickly take a look at why we said we could look for potential opportunities to the downside in the Euro. If just quickly go down to our analysis. We can see that we said here that the Euro currently remains our most bearish major currency given the bleak economic outlook for the Eurozone with analysts and economists expecting a drop of as much as 10% in GDP for the current quarter.

Thus, with the biggest net long position among the majors, we will continue to look for any significant rallies for shorting opportunities on the Euro. If we had a bullish bias on the Euro right now, for example, how we could then use the COT data is to say, “Okay, we are bullish on the currency but the currency has a very big net long position.” Which means that at some point, pullbacks are becoming more and more likely.

Which means if we are already long in a trade on the Euro, we could start to look for some potential exits. Or it means that any new trade we take needs to be shorter duration trades because that likelihood of a pullback is becoming more and more likely with that very big net long position.

Alia, I hope that helps you out there. If there’s any other questions, don’t hesitate to let us know.


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