Please look at the chart below of the COT index.
This Chart is of the Aussie and it shows how committed traders are to the Aussie.
The yellow line is price, the blue histogram is non-commercial positions and the yellow histogram open interest or total number of positions open. (Volume)
A few notes here:
I have 5 boxes marked and how I read this information.
First thing we need to always recognize here is that we are in a downtrend. Find the trend and now it becomes easier to read the info correctly.
Block 1 : We can clearly see how traders are committed ‘too bullish’ on this currency. The price starts to drop just after that. So why should that happen? Think of it this way: Traders are all committed to their position and cannot buy more, they are all over committed! It is here where the selling begins, or profit taking. Now that everyone is up to the brim, or sentiment is at a high bullish or bearish, the market are likely to turn.
Block 2: Just before block 2 we can see a bear market and how the positions swing to all bearishness and not strange at all that the price go up after over commitment of bears. In block 2 we now can read the information on the histogram that less traders are bearish, so more traders are going long, usually noted after a bottom.
Block 3: Again after a sideways period, many pick the bottom and we can clearly see how traders commit to the bullish side thinking a bottom is in place where after the trend just continues lower.
Block 4: The small block; and yet again, it seems every time the market just makes a small bounce, traders buy in and commit to the upside mistaking it as a bottom.
Block 5: Deja vu? history repeating itself? This is the reason I am looking for signs of a turn in the Aussie to go lower again. Strange? 1) The bounce, 2) every trader and his dog committing to bullishness? Looks to me exactly as the same scenario as in block 4?