2Bull Forex Blog

You may not have heard of the Commitment of Traders Report, published by the CFTC – but this easy to understand indicator, can help you spot EVERY major trend changes in advance and trade for huge profits with low risk.

The commitment of traders report is available FREE, but very traders use it - yet it can predict important market tops and bottoms, with amazing accuracy and give you the biggest profits.

The Commitment of Traders Report

Insider trading is legal in currency futures markets, as long as the trading positions are reported to the CFTC and the report covers not just currencies but stocks, bonds and commodities as well.

The positions in currency futures mirror those in cash so it’s applicable to cash forex positions. It’s realized bi-weekly by the CFTC and is free to use.

The Commitments of Traders Report divides the positions held into three groups.

1. Commercials: They own the commodity they are dealing in and are using the futures market to hedge their position.

2. Large speculators: Are a group that hold large reportable positions. These traders are normally large fund managers or very high net worth individuals.

3. Small speculators: This group includes everyone else and they are normally speculators looking to make a profit.

The markets see price spikes all the time which push prices away from fair value and as you can see on any price chart these price spikes don’t last long and prices return to fair value. This is crowd psychology at work and the emotions of greed, hope and fear push prices up or down to far as a result.

It’s a trading fact that prices collapse when the fundamentals are most bullish and rally when they are most bearish as prices break from overbought or oversold levels.

The traders who can spot the price spikes of greed and fear and act on them have the chance to make big profits and this is why the net trader’s positions of the Commitment of Traders Report are so important.
A close look at the group’s motives will explain why.

1. Commercials:

They are using their positions in the futures markets, to hedge their cash position. They trade without emotion, as they are hedging risk, and NOT speculating for profits.

These traders have a deep understanding of the fundamental supply and demand position and know when prices have been pushed to far from fair value.

When emotional price spikes occur they will “fade” the move - selling into emotionally generated buying and buying into emotionally generated selling.

As they are hedging, they will only change their positions when prices move significantly away from value and they represent the smart money and the traders you need to watch.

You then need to see if the other two groups both motivated by emotion are doing the opposite. If the commercials oppose the other two groups a price break in favor of the commercials is on the cards.

2. Large Speculators:

This category is dominated by funds that make their money trend following and selling greed to investors.

These large speculators tend to have a poor performance overall as a group, and normally get caught out at major turning points

3. Small speculators:

Small speculators are an emotional group of traders again with a poor track record and are always caught heavily long at important market tops and short at market bottoms.

Small moves in commercial positions are not important – commercials only move when big moves occur because their hedging and small moves are insignificant to them. When you see commercials buy and sell aggressively and speculators hold a heavily opposed position you have the set up for a price break in favor of the commercials.

It’s a fact that:

1. The commercials are disciplined unemotional traders.
2. They know fair value of what they are trading in.
3. They are RIGHT about all major tops and bottoms and speculators are not.

By tracking the commercials are you tracking the professionals who know fair value and are the smart money and if you follow them you will see every major top or bottom forming.

Keep in mind:

They provide the set up – not the trigger to buy and sell and you should use your usual forex trading signals on your forex charts to time entry – but if you want a tool that will show major tops and bottoms forming in advance watch the commitment of traders report and you will add a valuable tool to help you achieve currency trading success.

If you are new to Forex trading if you don’t understand the simple equation we will outline in this article you will join the 95% of traders who lose. The equation is simple but its implications for your currency trading success are huge.

Here is the equation and below are some points you need to take into account when implementing your forex trading strategy.

The equation is

Fundamentals ( immediately discounted) + Investor Perception ( logic greed and fear) = Price Movement

Simple?

Yes - but these are the critical points you need to understand in relation to the above:

1. Trading News Will Not Help You

We live in a world of instant communications and the fundamentals are immediately discounted by the market so you cannot trade them for profit.

2. Prices Do Not Move Logically

If they did we would all make money prices move away from the fundamentals and the price direction can be the exact opposite of what logic tells you. Why?

Because traders all have the same facts to look at but draw their own conclusions about what they mean and when greed and fear come into play prices move in mysterious ways.

3. Markets Do Not Move Scientifically

Ever read about being able to predict markets in advance? You cant! You cannot predict what a broad mass of emotion will do to the markets in advance – trading is a game of odds not science.

If markets were scientific, we would all know the price in advance and there would be no market!

The above points are true, yet most traders simply do not take them into account when developing a forex trading strategy - but unless you understand the above you will never win.

So How Do You Win?

The best way is to let the market tell you which way prices are going - this means simply following price action and using forex charts.

Forex charts take into account the fundamentals (they simply assume they are discounted instantly) but they do something more:

They give you the big picture i.e how the investors perceive them.

While human nature cannot be reduced to science, human nature is constant and price spikes away from the long term fundamentals NEVER last long and these are easy to spot and trade for profit.

Forex technical analysis simply postulates that you should act on the reality of price and the price is right - no matter what you or I think.

By trading the price as it is, you are trading the truth without imposing your opinion.

Most traders try and impose their opinions or try and predict in advance where prices may go - but this is doomed to failure and that’s why 95% of forex traders lose.

TRADE THE ODDS!

There are no certainties when you trade only probabilities and it is these you need to look at and trade when the odds are in your favour – you won’t win every trade just as a successful poker or blackjack player doesn’t win every hand - but by trading the odds, you will win more than you lose over time enjoy currency trading success.

Today, many traders buy rubbish courses and e-books that tell them they can win consistently, because markets move to a set pattern, so they can predict in advance what will happen – they don’t work.

If you want to win, you need to forget the idea that trading is easy, its not - that’s why the rewards are so high.

However, forex trading can be learned by anyone with the desire to get the right forex education and learn to trade the odds.

Currency trading success involves looking at price and calculating the odds of success and you can do this via forex charts - over time if you can spot and trade the high odds set ups and make a lot of money – it really is that simple.

If you want to time your trading signals with great accuracy then you need momentum indicators and if you are looking for one of the best look no further than the stochastic. It is an essential indicator for all traders serious about making bigger profits so let’s look at it.

Why is it such a vital indicator?

Quite simply, it gives you advance warning of shifts in price momentum near important turning points allowing you enter the market with great accuracy for bigger profits.

An Introduction

George Lane, who developed the stochastic indicator, concluded that in an up-trend, prices tend to close near their high, and in a down-trend, prices tend to close near their lows.

The further the price closed away from the low or high the stronger the trend was likely to be.

We have all seen this in forex markets and this simple observation was the basis for the stochastic indicator.

The stochastic indicator therefore is:

A momentum oscillator that can warn of strength or weakness in a currency in advance making it a great leading indicator to confirm trading signals against chart support or resistance.

The Technical Bit!

Don’t worry if you don’t understand how the equation works – it’s a visual indicator and you can simply look for the set ups on most major chart services so the math’s below is only for those of you who really want to know – for the rest of you skip it and move to the next paragraph.

The stochastic is plotted as two lines %K, a fast line and %D, a slow line.

The %K line is more sensitive than %D.

The %D line is a moving average of %K.

The %D line triggers the trading signals.

The way the stochastic is plotted is actually very similar to the way a moving average is plotted.
Just think of %K as a fast moving average and %D as a slow moving average.

The lines are plotted on a 1 to 100-scale.

“Trigger” lines are normally drawn on stochastic charts at the 80% and 20% levels.

A signal is generated when the lines cross.

The zones above and below these two lines are referred to as stochastic bands.
Overbought and oversold levels.

The 80% value is used to show when prices are overbought and, the 20% value is used to indicate when prices are oversold.

The Stochastic generates signals in various ways and the two below are very effective:

1. Overbought Oversold

When the 20% and 80% trigger lines are crossed the following action is taken.

Buy when the stochastic moves below 20% and then rises above that level and sell when the stochastic rises above 80% and then falls back below this level.

2. Stochastic Crossovers

Crossovers are very effective.

Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line. You need to be cautious of short-term crossovers that may generate “false” signals.

The best crossover is when the %K line intersects after the peak of the %D line (known as a right-hand crossover).

3. Stochastic Divergences

Divergences between the stochastic and the underlying price trend also offer good signals to trade and are a great leading indicator for entering positions.

If prices are making a series of new highs and the stochastic is moves lower or crosses then you have a warning sign that price momentum is weakening and a top may be at hand and vice versa in a bear market.

Combining the Stochastic With Other Indicators

The stochastic is probably the best momentum indicator and can work with just support and resistance on your forex charts. It can also be combined with other momentum indicators to filter false signals and the Relative Strength Index is ideal for this.

If you want to improve your forex trading strategy and time you’re trading signals with great accuracy, take a look at the stochastic indicator and you will improve your chances of currency trading success.

The Relative Strength Index RSI is a popular and powerful technical analysis oscillator which has numerous applications including:

Indicating the strength of a price trend and also generating buy and signals with price divergences. The Relative strength Index is quite simply one of the best indicators to use with your forex charts so let’s look at it.

Background

The RSI, as its name implies measures the relative strength of price currently compared to its past price. The RSI was developed by J.Welles Wilder and was outlined in his classic book “New Concepts in Technical Trading Systems” published in 1978.

The RSI does not show just the markets strength - but the strength compared to the markets former price history.

The RSI is calculated as follows:

Do not worry if you don’t understand the mathematics, this indicator is very visual and you can simply watch the set ups – you don’t need to know how an internal combustion engine works to drive a car and it’s the same with the RSI.

For those who like math’s here is the calculation:

Within a set period of days - the individual difference between the upward closing prices (Close today Close previous day) are added together - the number is then divided by the number of observations in the period chosen minus one.

The end result is the day’s mean value of the upward and downward strength of the market which is then displayed visually.

Keep In Mind

The shorter the Period of time used for the RSI calculation, the more volatile the RSI will be. The RSI indicator has a default of 14, which is the value Wilder originally used when he calculated it. Other values have become popular and include 9, 11, and 25 day periods.

Using the RSI

1. Divergence of Price and RSI

Say the market makes new highs on the chart but the RSI fails to get above its previous high – this would indicate that the trend is starting to falter and is running out of momentum.

Here Traders would be alert for trading signals to enter contrary to the current trend.

2. As an Overbought / Oversold Indicator

The RSI measures the market’s strength and weakness as we have already seen and works very well as an overbought oversold indicator on forex charts.

An RSI, above 70, indicates an overbought bull market and an RSI below 30 indicates and oversold bear market.

When these levels are reached, traders would be looking for a price break and to execute trading signals in the opposite direction.

Combining RSI Other Indicators

By indicating the strength or weakness of price the Relative Strength Index acts as a leading indicator, to alert you to changes in the trend.

The RSI can be used by long term trend followers or swing traders and is simple and easy to use.

Like all indicators it doesn’t work all the time.

To confirm trading signals, it should be used with other momentum indicators and perhaps the best is the stochastic - to actually trigger the signals, once the set up has been spotted on your charts.

The Relative Strength index is now nearly 30 years old - but just like the other indicator Wilder outlined in his book (Average Directional Movement ADX) its a timeless indicator, which will enhance any Forex trading strategy.

Try using it with your forex charts, combined with the stochastic indicator and you will trade with greater accuracy, great profit potential and enjoy greater currency trading success.