Before spot Forex trading became popular, or even available to general public, currency futures were about the only instruments through which average trader could trade foreign exchange. In fact, they are still popular and experienced their own growth, in line with explosion in all futures trading. For example, when I traded IMM (International Monetary Market) futures, only Yen, D-Mark, Pound and Franc were relatively liquid. Canadian Dollar had an average volume of 800-1000 contracts a day and Aussie something like 400-600. This made for bad fills, slippage and, if trading multiple contracts, split execution. Times have changed and both of these contracts are very viable trading vehicles.

Some people still prefer using futures instead of OTC FX. Central clearinghouse guarantees integrity of trades, something that spot market lacks, even though it is rarely an issue. Most of traders will never experience troubles with settlement, but those very few involved in such dispute will not be happy. Another potential advantage of using futures is volume data. Exchange reports number of contracts sold and bought. This is later distributed by Commodity Futures Trading Commission in number of releases.

Since IMM contracts are dollar based, most data derived from them could be useful in USD trading. For example, one of the reports details USD net short/long position, which indicates if market participants as a whole are bullish/bearish the dollar.  Futures traders are just like any other group of market players. Collectively they tend to be wrong on the market direction and sentiment. Extreme, or above average bullish/bearish imbalance probably happens at precisely the wrong time. Some people use data, like the CFTC report, as a contrarian indicator and try to trade against the crowd.

By cross referencing the numbers, one could test market sentiment among other currencies. For example, last week long Swiss Franc positions dropped dramatically, while short positions almost doubled, as expressed by speculative interest. This indicates that crowd has expectation of CHF to get weaker. All this is in face of Swissy’s strong rally last week. I also had a small loosing trade in EUR-CHF. No doubt everybody is hoping for Swiss National Bank intervention. At the same time AUD positions remained extremely net bullish and even increased a little bit, in spite of rather harsh sell off in Australian Dollar. Aggregate of these numbers makes public sentiment bullish Aussie and bearish Swissy, or long AUD-CHF.

Well, chart suggests otherwise. Intermediate, 4H graph shows market in the process of building a topping pattern. It already tried to break couple of times. The more of these tests of support happen, the higher probability of success becomes for next sell off. If it comes. I normally don’t trade on sentiment and similar concepts. They are valid, I think, but lack the precision needed for shorter term trading. At any rate, I was doing some studies this morning, came across the numbers and thought it could be fun to put this to the test. So, placing a sell order here at 0.8848, with an objective of 140-150 pips. Since this is 4H chart, it could take 2-3 weeks.

Of more interest to most is Yen situation. It was covered to death in previous posts, with a lot of trades featured here. I’m taking a step back away from hourly charts and see what 4H are showing. I’m sure fewer trades will be taken in JPY pairs, as charts vary to degree from cross to cross on this time frame.

CAD-JPY seems to be the best candidate for a sell. It has this well defined, strong support at just under 86, which is likely to be attacked again. I doubt it will happen right after the open, but chances are high for another test over next few days. Should prices manage to fall, they could reach 83 or so. I’m placing  a sell order within these parameters. Problem with this particular chart is that situation is very clear cut and must be visible to everybody. This could make it ineffective. We’ll see.

As always at this time of the week, opening gaps are something I watch for. With increased volatility last week, chances are higher for gaps to form. This includes Yen pairs, and Australian Dollar which also became very jittery over few previous sessions. And anything else that would like to gap.

Mike K.