As a stock trader who has also moved to currency, futures, commodities and options trading, one of the biggest problems (for me at any rate) was the lack of volume as a technical indicator in the currency markets, and whilst the COT report does not provide the whole answer, it does give a partial solution to this perennial problem.
Now I know for a fact that many traders will disagree with me on using Open Interest as a momentum indicator, but again it is just the way I trade – it suits me and I do not use it either as a timing indicator or indeed in isolation. It is another ‘indicator’ in the broadest sense of the word.
So what are we looking for here – again it is very simple as all we look to assess is the overall strength or weakness of the move, based on changes in the open interest volume of futures contracts. For example, suppose the spot market has been in a long uptrend with increasing volumes of open interest futures, but then the volumes start to level off and fall, this could be a signal that the trend is coming to an end. Similarly a rising trend in the spot market with rising volume in the futures is a positive signal that there is momentum in the move. This is based on the very simple assumption, that rising volume suggest new money or aggressive buying entering the market, and falling volume is the reverse. An over simplified approach I know, but this is just another tool to use with all the others. Again, this is the same period on the CAD/USD as in the previous example and we can clearly see the decline in open interest volume over the period. What is the chart telling us ? – with volumes almost 50% lower than 3 months ago, then perhaps the trend of the last few months is coming to an end, with falling open interest volume – maybe, maybe not, but at least it gives us another, and different view, on the currency pair, which we can then compare with the charts. As always we would be looking for areas of support or resistance to confirm or deny the above indicator.