Forex Options Trading - Making a Career Out of Being Sentimental

That is what you actually do when you gauge the sentiment of the market in order to help you with your forex trading. It is more aptly termed as sentimental analysis. Sentimental analysis simply put is knowing how the market is, whether it is bearish or bullish, oversold or overbought.

To enable the forex trader to determine the varying conditions of the market, two methods can be used, the technical analysis and the fundamental analysis. Technical analysis makes use of technical indicators and charts to enable traders to predict future movements by studying the trends of prices while the fundamental analysis focuses on the economic news reports and other indicators like employment data, political movement, GDP, etc.

For sentiments that are measured with voluminous data, such as in options and stocks, the COT report is made use of. COT or Commitment of Traders Report, as published by Commodity Futures Trading Commission (CFTC) comes out Fridays to assist traders with their currency trading. The COT falls under the fundamental analysis. It is tasked to present net short and long positions traded in the forex market. This is a means of gauging the market sentiment of the "big players" and the "smart money". They report to the government due to their large positions. With the COT, traders will be able to learn how these big players move and how they impact the smaller traders' positions.

The COT is quite useful to forex traders especially when observing market reversals. However, it is still better to study and even do some back testing on COT reports and incorporate the trader's own feelings of what may actually work. After all, what really drives market prices are the peoples reaction to reports such as the COT, on politics and the economic movement. What is best is to use the COT, or other tools such as the Fibonacci numbers and the Stochastics, and combine it to what is actually happening in the world. This way, the trader may be able to gain an insight of the markets probable movement and may be prepared to do something about it.