The big boys seemed to have filled their plate…again!
Now when I talk about the ‘big boys’ I am of course talking about hedge funds and large traders.
I’m sure that’s the universal saying anyway!
The beauty of being a retail trader is that we can see what hedge funds are doing on a week to week basis via the Commitment of Trader reports.
The Commitment of Trader reports also known as the ‘CoT’ report is a weekly report that shows positions by commercial, non-commercial and non-reportables. They are collected on a Tuesday and then released on a Friday.
Commercials are entities that use the futures market to HEDGE global risk. For example, if Tesla is buying parts from Japan for the new Model 123 then they need to purchase the product in JPY and would need to convert USD to JPY. Businesses hire FX specialists to get good rates on their capital.
Non-commercials are known as large speculators. These can be hedge funds or individuals who make large transactions or trades in the markets to try and make money from them. Hence they are speculators.
Non-reportables are not to be followed really, they are not typically successful in the markets.
Long story short, anyone or anything that trades over a certain position size in the market has to declare it to the Commodities Futures Trading Commission (CFTC). Otherwise, they could get a hefty fine.
If you are new to the Commitment of Trader reports they are FREE and you can find out more information about them via the CFTC website.
These reports help me identify what the ‘big boys’ are doing and more importantly, if I should follow them.
Let me give you an example.
Hedge funds have been buying the Japanese Yen futures contracts over the past 5 weeks.
We can see from the Jan 28, 2025 report on the right hand side, that net contracts (the difference between long and shorts) were at -959 contacts.
By the time we get to March 4th, 2025 the contracts have reached an all time high of +133,651. So if hedge funds are buying, what do you think we should do? BUY!
However, there is another element to the contracts which I feel is useful as a retail trader myself.
It’s what’s known as an ‘extreme’.
An extreme occurs when the contracts of any futures asset reach a significant high or low that we haven’t seen for a certain period of time, which can be 6, 18 or 24 months.
Think of it as an overbought or oversold indicator. When contracts reach an extremely bullish level it is considered overbought and a reversal may occur. On the opposite side if contracts reach an extreme bearish level then it could be considered oversold, leading to a potential reversal.
Check this out.
On 27th of January, hedge funds were selling GBP futures at an extreme that was similar to that of April of 2024. This essentially shows us that the GBP futures contracts were oversold.
Look what happened to the price after this, the price rallied!
Now if you’re new to this data you may have sold the GBPUSD price in January because it was in a downward trend.
Which is fair.
But imagine if you had a tool that told you or highlighted that the price was oversold by hedge funds.
The guys that move the market!
I believe that this simple information can be a big help when it comes to trading the markets.
Now that we know what the reports are and what I look for let’s talk about the current situation with the reports.
Currency the Japanese yen contracts are at an extreme overbought condition with contracts up at 133,651. This suggests that we should look for a reversal in price, even if it’s for the short term.
Another currency that has also caught my attention, is the New Zealand dollar.
Contracts of the New Zealand dollar have reached an extreme low, suggesting that it’s in an oversold condition.
This makes for an interesting set up for me.
One currency oversold, one overbought.
Perhaps we could see a reversal on NZD/JPY form?
The price of NZD/JPY has been in a strong downward trend, which is no surprise considering the hedge fund positioning over the last 5 weeks.
But now we can see from the daily chart the price is forming a double bottom pattern around 83.90. This pattern can be indicative of a reversal in the price.
The neckline of the pattern is up at 85.25 and would be short term target for any trader that is long.
A breakout of this neckline could be a sign of a bigger reversal pattern forming.
Now it’s important to note that the CoT reports are lagging as they are released to us on a Friday having been collected on the Tuesday prior.
So they suck at timing the market, that’s why I talk of them as a breadcrumb. Another layer to your trading analysis.
They are most certainly not the be all and end all of trading, but they can provide some social information.
I also like to add that the fundamentals driving these markets are favouring JPY upside.
With the Bank of Japan looking likely to hike rates further this year it could make the JPY strong.
So when I look at this move, I believe it’s a short term one.
Which also brings me to risk. This is a reversal set up so for me as a predominantly trend based trader, I will lower my risk for a trade like this one.
Remember guys, it's important to understand WHY you should trade a market rather than looking for an opportunity.
Understand WHY, check the CONDITIONS of that market then apply a STRATEGY to be consistent.
Let’s be the 5% and good luck out there!