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INSIDER FOREX TRADING INFORMATION-COMMITMENTS OF TRADERS REPORT
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There is one more piece of information that spot forex currency traders can “borrow” from the futures industry; it is the Weekly Commodity Futures Trading Commission's Commitments of Traders report. The primary pur pose for this report is to monitor trading activity and to have a tight sur veillance program in order to identify situations that might pose a threat of a market or price manipulation and, therefore, allow traders to take appro priate action.

The CFTC market surveillance staff closely monitors trading activity in the futures markets in order to detect and prevent instances of potential price manipulation. Some consider this “insider trading” information because every week we get to take a look at which investor group is taking which side of a trade. There are many studies and books written on the sub ject. (Larry Williams was a pioneer on the subject. Also, it was covered in my first book A Complete Guide to Technical Trading Tactics (Wiley, 2004), on pages 162-165.) As a veteran trader for over 26 years, I have used this information to capture many significant moves in the markets. In the sample shown in the table in Figure 1.17, there are several categories. The first is the Non-commercial, which lists all large professional traders or en tities, such as hedge funds, commodity trading advisers, commodity pool operators, and locals on and off the exchange floors. It includes any trading entity that hits a reportable position limit; for instance, in the CME, in 2006, the limit for currencies was 400 contracts.

The next category of importance is the Commercials, which includes banks and institutions or multinational conglomerate corporations look ing to hedge a cash position. The long and short open interest shown as Nonreportable positions is derived by subtracting total long and short reportable positions from the total open interest. Accordingly, for Non reportable Positions, the number of traders involved and the Commercial/ Non-commercial classification of each trader are unknown. This balance of positions is assumed to be the small speculators. If you look at the first col umn under Non-commercials, you see the breakdown of how many long po

sitions versus short positions are held. The next line shows the changes from the prior week; this is important information because you will be able to see if these guys unloaded some of their positions or added to them from one week to the next. The line under that tells you what percentage of long and shorts is held, and the last line shows how many traders control longs or shorts. The information is gathered as of the close of business every Tuesday by each of the clearing brokerage firms and is turned over to ex change officials, who then report the information over to the regulatory body know as the CFTC. This information is released on Friday afternoons at 3:30 P . M . (EST). Before acting on a decision based on this information, it is critical to know if there was a major price swing from Tuesday's close to the time the information was released because positions may have changed hands.

CAN YOU MAKE MONEY FROM THIS INFORMATION ?

There is always a chance to make money; the key is to be able to afford not to be too heavily leveraged if the market moves further than anticipated. This report is like an insider information report. It acts like a true consen sus of who literally “owns” the market. A forex trader can use this data to determine if market participants are too heavily positioned on one side of the market in a long-term trend run. It is generally the small speculator who is left holding the bag. I mean, let's face it, money moves the market and the banks and large professional traders are a bit savvier when it comes to their business. After all, one would think a bank has a good idea of the direction interest rates are going to go in once a central bank meeting occurs, right?

Suppose the small speculators are showing a nice short position of, say, at least two longs for every one short. If the Non-commercials are net long and the Commercials are net long, chances are that the small speculators will be wrong. I am looking for imbalances in markets that have been in a trending market condition for quite some time, and therefore I can develop a game plan and start looking for timing clues to enter trades accordingly. Keep in mind that the Commercials can and sometimes are not right; they are not in the market to time market turns. They are hedging their risk ex posure in a cash position. Therefore, the Non-commercials, or professional speculators, in the short term are considered the smart money. Here are some general guidelines to follow:

• If Non-commercials are net long, Commercials are net long, and the Nonreportable Positions category is net short by at least a two-to-one margin, look at buying opportunities. In other words, go with the pros.

• If Non-commercials are net short, Commercials are net short, and the Nonreportable Positions are net long by at least a two-to-one margin, look at selling opportunities.

• If Non-commercials are net long, Commercials are net short, and Non reportable Positions are neutral, meaning not heavily net long or short, look at buying opportunities. Stick with the smart money, the bank and institutions category.

Let's put the theories to the test combining volume with the Commit ments of Traders data by studying the chart in Figure 1.18. This is the British pound futures contract; the chart pattern resembles a rounding bot tom or an inverted head-and-shoulders formation (both of which we will cover in the following chapters). The CFTC report was released on the close of business on April 14, 2006 . With the information at hand, we can determine that the Commercials (banks and institutions) were net long the market, the large speculative Non-commercials were net short, and the Nonreportable small speculators were net long. Granted, these are not heavily weighed numbers—we don't see a tremendous imbalance like a two-to-one ratio of net shorts versus net long in the small speculator cate gory—but we do see a two-thirds grouping of net longs led by the Com mercials and the Nonreportable small speculators. The Non-commercials are the only ones net short and needing to buy back their shorts. If we in tegrate our newfound knowledge of using volume studies, we can determine that prices are rising with an increase in volume. This signals a healthy market condition for the bulls. It signals that buyers are entering the market, not just a small short covering rally. In early May, we see a small consolidation pattern called an ascending triangle form; and as prices break out to the upside, the volume levels are increasing as well, indicating continued strength and a strong bullish trend.

Now let's look at the spot forex market as shown in Figure 1.19. Ex amining the low in April, a candle shows a hammer pattern that formed in both the spot forex and the futures markets. Then, taking the information from the CFTC COT report released on that Friday, we know Commercials were net long. In addition, we see the increase in volume, as shown in the futures chart in Figure 1.16. This helped clearly identify that higher prices were accompanied with rising volume. This is a very healthy sign that a major price move could be underway. Here is an example of where digest ing the information on volume with COT data could help you make the de cision to diversify your trading approach with a long-term position. From what we have covered in this chapter, you could go long an outright spot forext British pound or could enter in a mini-lot position. You could use a futures option strategy or could invest in the British pound ETF (FXB). Several techniques that we will go over in this book are trend-line breakouts from wedge patterns and the Defcon III trading signals that alert to long entry as indicated with the little triangles shown in Figure 1.19. The factual data revealed in the CFTC COT report is tremendously important in formation; and, best of all, it is easy to access and free.

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