If you want to know how to use Commitment of Traders for your analysis, then this thread is for you👇🏾(it's an advanced lecture just incase you find it hard to understand). RT for other traders on your timeline @Danny_Walterr @DannyCrypt @ThePaulOla
Let's start off with something called Interest Rate Differentials. It is the difference between one country's interest rates versus another. The importance is that on a central bank or interbank level, large flows seek yield. That means they're always looking for a rate of return
How do you get the information on which country has the highest yield? global-rates.com is your answer. As a foreign exchange trader, this will give you the foundation for finding real markets that are engineered to go a particular direction
but you have to look for something specific and that's the DIFFERENTIAL. It is not enough to look for a high-yielding interest rate country. You need to find a high-interest rate yielding country's currency and couple it with a weak currency. Here's an example below
At the time of this tweet, the Japanese interest rate is -0.100%. If we found a currency that has a high yielding rate relative to Japan's, we'll look at the central bank's rate for America at 0.250% so there is a differential between the two. The higher interest rate is with
the American Dollar versus the Japanese Yen meaning the differential is positive for the dollar and negative for the yen. Since we have that fundamental backdrop on the interest rates front, we can go into the Commitment of Traders chart. It is a line chart which in that format
does not give a whole lot of information. What we're interested in is the red line which is the commercials or in other words, the central bank. When they go above the zero basis line, it doesn't necessarily mean it's a buy, or just because they're below the zero basis line does
not mean the dollar index is going to go down. What we're looking for is a combination of interest rate differential and the highest long position or the lowest short position held by the commercials. Since we're looking at the dollar index on the COT chart, and we're thinking in
terms of it being a higher interest rate, the dollar has the better interest rate. So what we're looking for is the time where the dollar has the commercials being above the zero basis line. We see that in the later portions in December 2020.
That by itself is bullish only if we see the opposite with the Japanese Yen. Remember, what we're doing is we're matching up a strong fundamental interest rate differential against a weak interest rate differential. That being the dollar versus the yen.
If we take a look at the yen, we'll see that as we cross from December 2020 into January 2021 the commercials have never been that net short in other words they're thinking it's overbought and it's likely to go down. By itself, it doesn't mean anything.
What you'll then be looking out, for now, would be a break in the market structure (whatever that would be for you). Once that occurs, then all of the understanding that I've outlined for you where it's bearish for yen and bullish for the dollar and the interest rate differential
will now kick in. The algorithm will start to reprice the yen lower and the dollar higher or consolidate the dollar. How does this translate to a forex chart? I will answer that question tomorrow in another thread. Until then stay safe and take care of yourself.
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