Well, guess what? Currencies are also traded on the futures market, and what you'll learn from reviewing this data every week is where banks are positioned and where speculative and small traders are positioned. Although by the time you get the data (every Friday after 3pm) it is 3 days old, it can still be used in conjunction with technical analysis to determine a reversal. In this post I'm also including posts from a couple of other traders who explain the usage of COT data very nicely. You can download the COT excel spreadsheet here 
which you can use to update currency futures data each week.
Enjoy and happy trading!
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"The Commitments of Traders report can signal a significant market correction when it shows that the Commercial traders are accumulating positions that are against the prevailing trend. It is not a trigger, it is a heads up. It stands to reason that even the banks and big institutions have to decide when to take profits, so when the market shows signs of trend exhaustion, the smart money is going to sell off at the highest prices available. The problem is that picking the top of a trending market is a daunting task. If you try to “guess” the top you will drain your account. The trend can be relentless. So first you must look for signs of trend exhaustion and reversal, and receive confirmation “across the board” before you even think about pulling the trigger on a trade.
In the following examples of trend exhaustion and signs of reversal, I am going to use LONG examples only. It is too tedious to continually try to cover both scenarios of long and short, so in these examples the market is trending long and the correction we are looking for will be a short (sell). From here on the projection calculator that attempts to calculate a daily range of prices, will be called “Chin Calculator”
SEVEN SIGNS OF TREND EXHAUSTION AND REVERSAL
1) Above the Chin calculator are calculations “Lower Low, Lower High, Higher Low, Higher High”. When the market is trending long, and making higher lows and higher highs, and the “yesterdays prices” row shows that the market failed to make a Higher High, this is a signal that the market could be setting up for a correction.
2) When the market is creeping up to a significant level of resistance in low volatility, this is a great sign for reversal
3) Divergence between price action and indicators. Pick your favorite, Stochastics, MACD, RSI, etc. When the market makes a higher high, but the indicator refuses to show a higher high, this can be a leading indicator of reversal
4) Reversal Candlestick patterns and familiar patterns of double top and head and shoulders on longer time frames. Also when bullish candles are getting smaller and smaller
5) Commercial accumulation. The market goes in to a tight range, usually 25-30 pip range. Commercials are systematically selling off long positions and gathering short positions, using the trend as it bounces off of the daily pivot to get the best prices. Look at a 5 minute chart and compare the bullish candles to the bearish candles. The bearish candles should be longer and have a higher volatility count
6) A group of small traders try to “pick the top” too early with a tight stop, and an exhaustion move happens when the market hits their stops.
7) Finally, your favorite overbought, oversold indicator. Mine is RSI. When the RSI passes 70, it is overbought, and 30 for oversold. Higher the timeframe the better.
Last week, for example, the commercials were short the GBP, and were long the JPY. That gave a great heads up for a short GBP/JPY trade, but the problem is………
When? I mean it is like believing in the second coming, you know it is going to happen, but the market keeps tarrying.
Interest rate differentials can give a little clue as to when this move could happen. In this case, since the GBP has a better intrest rate than JPY. The reason for this major uptrend is that when one holds a long position overnight, you are paid intrest (or swap). So you get the double benefit of trading with the trend, and intrest accumulation. So if intrest accumulation (carry trade) is the “carrot in front of the nose” for the trend trader, then Wed. which is “triple swap Wed.” is the big payoff. This happens at the NY close on Wed. If you are holding a long position you get paid triple swap (3X intrest) So common sense tells you that if you are looking for a GBP/JPY short, it has a better chance of happening after the run-up for triple swap Wed. Conversely, if the commercials were short GBP and long USD, the swap rate is in favor of short positions, because right now USD pays a higher rate than GBP, common sense tells you that this short trade would have a better chance of happening earlier in the week and reaching its highest momentum on triple swap Wed.
You can also gain insight as to when a move could happen by looking over the news for the upcoming week, and asking yourself, which news announcement could create the volatility needed to make this move happen? Which upcoming news announcement could make the Commercials want to square positions before it happens? Last week it was the GBP rate decision. Forexfactory.com is a great resource for finding out how important individual news announcements are.
OK, now you have a heads up, with COT, and some general vigilance about when the move could happen. You are looking for signs of trend exhaustion and reversal. Now let’s try to get an idea of at which levels this could happen. Follow the instructions on updating the Chin calculator. Update early in the evening (or as often as you like), and this will give you a pretty good idea what high daily prices and low daily prices could be. Set price alarms for the “bargain prices” that you are looking for. . MY ALARMS GOT HIT! CAN I PULL THE TRIGGER NOW?
No, you still have to wait for confirmation across the board. You guessed it. This is where the currency meter comes in. I like to use the “lines” page. When the currency relative strength meter comes into alignment with your trade, you now have confirmation across the board, and permission to pull the trigger. In our GBP/JPY short example, JPY was strong and GBP was weak. When the market is slamming in the direction you were looking for, use any technical setup you like to get in. This setup is usually good for over a hundred pips if you are patient. Sometimes hundreds of pips.
Good trading, Lee"
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Re: [forextraderforum] A New System
Hi Robert.
COT are not remotely unique to my system. In the world of free information, they are well known in the trading community and used as a sentiment indicator.. On another board, Lorena stated it much better than I could
The concepts are the same, only the names of the currency pairs have changed. This past week, if you go back in your posts, I was looking to fade the GBP/JPY.
Lorena's Post
> The COT charts are a seminar in themselves (Google "commitment of
traders"), but I'll try to give the nutshell version, anyone that wants
to add or correct anything, please do so...
>
> They come from info that is reported to the US government about the
trading positions in the futures markets. We are not trading futures,
but there is no such data for the forex. The futures markets for
currencies correlates to what goes on in the forex world, so we can use
futures data as a proxy for the forex.
>
> The COT charts will graph the positions of 3 groups: Commercials,
Large traders, and Small Speculators.
>
> It is when you see the Commercials and Large traders at opposite ends
of the spectrum that you can anticipate a large reversal coming, it is
the Commercials that set-up the reversal, the Large traders are trend
followers and will stay with the trend till convinced it has reversed
(how many are still saying the Euro is going to continue up) and then
forced to close out their positions as price goes against them.
>
> *Caution* it can take weeks for the COT data come to fruition as a
trend reversal, but when it does it is often a fairly decent sized move.
You cant just look at the COT and say "oh look, the commercials are at
the extreme short side of the euro, jump in and sell the EURUSD"--you'll
get burned. You still have to use good technical analysis to find a
good entry, and set your stops appropriately. Just look at the
EURUSD...the COT has been extremely short on the EUR for a few weeks,
but it has made some 200pip swings up and down. I tried to show below
that there are technical and fundamental reasons why it looks like we
topped-out on the EURUSD, but you have to use sound judgment in getting
in, and staying in a position.
> Look at the AUDUSD, back in March, the commercials were Long the
AUD, but price sank about 400 pips before reversing for about a 800 pip
run up. What I think is happening it the trend-followers are keeping
the momentum going, while the commercials are loading-up on their
positions in anticipation of the inevitable reversal.
> Also, look at the Mexican Peso, the Commercials have been Long on
the Peso for several weeks, and price on the USDMXN has risen
considerably after a nice run down in April and May. (UP is
peso-negative, just like the USDJPY, USDCHF, USDCAD...because of the way
they are paired) But, the USDMXN has had several episodes of
topping-out that were just great sell opportunities. It hit a 1 year
high today and Neg divergence on MACD (like the EURUSD did yesterday)
then sank about 900 pips today (at about 9 cents per pip, per lot, which
I caught a good chunk of) . And last week's high turned out to be the
head of a nice Head and Shoulders pattern.
>
> When the commercials are at an extreme, like now with the Euro and
Peso, I tend to avoid entering trades that are counter to what the COT
is telling me, and just wait for another reversal...like the EURUSD's
run up to M3 this morning, then tanking.
>
> I like Barry Lees site. On the page that lists all of the
commodities, at the bottom if you click "ranked by COT index" I just
look at the top and bottom of the list for the currencies that are at
the extremes, and then look further at the graphs. The Peso is at the
bottom of the list now, which means the Commercial are at the extreme in
Buying it, (in the forex you would SELL the USDMXN pair if following the
Commercials), although the USD Index is approaching a Buy as
well....this may be why the USDMXN has vacillated so much.
> On the same page, the Euro is at the top, which means the
commercials are selling it...then look further at the charts to see if
it has hooked over and some are unloading their positions, and the Large
Traders(spec index) are doing likewise at the other extreme, that's time
to start looking for a good entry....like the the one-year high,
negative divergence, doubletop, price projected high of yesterday!
>
> It is not often there is two currencies at opposite ends of the COT
data and one is not the USD. This makes for a unique opportunity to
trade them both following the Commercials...my way of hedging in which
both sided eventually pay-off.
>
> Remember that the COT data is released on Friday, it is already 3 days
old, so consider what price did between Tuesday and Friday.
OK, that is Lorena's post, which I think is a pretty good description, but like she says, do a google search, and it will all become apparent. Lee
>
Lastly, join an email group or chat group that focus on finances- specifically the foreign exchange. FinancialChat.com is a great resource. I use Mozilla Firefox to which you can add Chatzilla (an internet relay chat component). The network is:
irc.financialchat.com. Type /join #forex for the forex chat room. Visit this page if you're new to IRC: http://www.irchelp.org/irchelp/new2irc.html
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