By looking at non-commercials week to week in the COT, you get a little guess as to how the bigger trading desks feel about a currency, correct?
Not quite. In fact, non-commercials includes Money managers, different ETF, Hedge and Mutual funds. They are major day-by-day players. You could use new COT format where members are split on more categories. It calls "Disaggregated" report. Here you could read detail information and explanation what each category means:
https://cftc.gov/idc/groups/public/...ments/file/disaggregatedcotexplanatorynot.pdf
Like if this week, spot forex was down and the COT also showed net shorts increased, you might conclude next week would also have some down pressure? Or if the eur lost value but net shorts in the COT decreased, it might indicate next week will have some up pressure?
It needs some skill from analyst. Last week was not quite common situation, because hedgers have increased longs. It means that they do not believe in EUR growth in long-term picture.
But rule of thumb is to watch for two major issues - extreme long and short positions. They point an areas where market could reverse in opposite direction. Second, in week-by-week analysis - any big action usually supported by open interest growth. You need not just net long or short position been increased, but you need to see new money flows in this direction. Otherwise, it means that position has changed due closing of opposite one, which brings not as strong effect and could mean different things. The value of change as net position as open interest is also important.
This is just one analysis tool among the others. It is powerful, useful, but this is not some prophecy indicator. Besides, data stands at the middle of the week and it is mostly lagging. It is especially useful in moment of big reversals, when you have technical situation in place, but need some confidence. COT data could provide it. Big reversals always have big impact on COT balance.
Also you need put COT data in context that you have. For example last week, we've mentioned that drop is too strong for retracement and we were gravitating to bearish development. COT data has shown growth of longs by hedgers, that I've mentioned and increasing of net shorts by speculators on the back of open interest growth - perfect confirmation. Nothing else is needed.
For example, here is COT data for gold. What conclusion we could make?
