The chart above shows the cross currency Strength Index of Speculators in green while the cross currency Commercials Strength Index is in red. The blue line is the AUDCAD currency pair price.
The Strength Index is simply a comparison of each currencys 3-year strength – the Strength Index of the base (first) currency minus the Strength Index of the quote (second) currency. These scores (for both speculators and commercials) are derived from the currency futures positions.
Speculator Strength Index:
This chart zooms in on the Speculator Strength Index over its own 3-year range with a scoring range from 0 to 100. A score of 0 means the lowest Strength Index score of the past 3 years and a score of 100 is the highest. Extreme bullish positions are marked at the 80 score level and extreme bearish positions are marked at the 20 score level.
Speculators are generally regarded as trend-followers and momentum traders. These for-profit participants often buy when price is moving up and sell when price is moving down. Speculator are sometimes caught at their most extreme (bullish or bearish) when prices have also become stretched. Extremes can be dangerous times for Speculators as the price trend can become exhausted with the risk of a pull back or a potential deeper reversal.
Commercial Strength Index:
This chart is the Commercial Strength Index over its 3-year range with a scoring range from 0 to 100 (lowest to highest). Extreme bullish positions are marked at the 80 score level and extreme bearish positions are marked at the 20 score level.
Commercial traders are large companies, institutions and hedgers who are in these markets due to their business activities. They are thought to be the most informed participants as well as the ones with the most capital. Their actions can almost seem like a value investor that buys low and sells high. At the extremes, Commercials are usually head-to-head against the Speculators and at these times the Commercials more often win the battles (however, not always!) as Speculators are quicker to retreat when price goes against them. Watch out for these commercial heavyweights at the extremes.
*COT Report: The COT data, released weekly to the public each Friday, is updated through the most recent Tuesday (data is 3 days old) and shows a quick view of how large speculators or non-commercials (for-profit traders) as well as the commercial traders (hedgers & traders for business purposes) were positioned in the futures markets.
The CFTC categorizes trader positions according to commercial hedgers (traders who use futures contracts for hedging as part of the business), non-commercials (large traders who speculate to realize trading profits) and nonreportable traders (usually small traders/speculators). Find CFTC criteria here: (http://www.cftc.gov/MarketReports/CommitmentsofTraders/ExplanatoryNotes/index.htm).
By CountingPips Research