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The Secret to Cashing in When Central Bankers Speak
I want to let you in on a secret that I’ve never revealed in Sovereign Investor before. First, let me set the scene…Last week, central bankers from Australia, New Zealand, the U.K. and the Eurozone all stepped up to the microphone to announce their rate decisions.
Like all professional currency traders, I always listen closely to each rate decision for any signs of what central banks may do next. Then I can trade their currencies accordingly.
If a central bank raises rates, then I know most currency traders will want to buy that currency to secure a higher yield. If central bankers cut rates, FX traders usually dump the lower-yielding currency. In that case, most traders look to sell.
But there’s a trick to trading around central bank announcements that goes beyond that….
Traders all tend to follow similar rules. So “the trading herd” in the Forex market reacts in a similar ways as central bankers announce their rate decisions.
In response, there are certain events in the currency market that typically happen before, during and after rate announcements. If you know these events are coming, you can profit off them.
In my experience, I’ve found you should trade long before or long after a central bank announcement. I’ll explain why in a minute.
This past week, we got a textbook example of this during the New Zealand dollar interest rate announcement. Check it out on the chart below.
Trade Before or After an Interest Rate
Announcement But Not During!
Click here to view larger image
Why It’s Better to Wait Until the Dust Settles
The safest times to trade interest rate announcements are actually in the hours a day or so BEFORE the interest rate announcement.
It’s because the “big money” (read: the institutional traders) stand aside and cash out their trades ahead of the rate announcements. They’re not trading. So you won’t see a lot of jumps in the market.
Instead, the market is likely to be the most stable, have the least surprises and least possibility of breakouts.
As a currency trader, it’s much easier for me to predict this type of controlled Forex environment. It helps ensure that trades don’t suddenly turn against you.
Take the euro for example. All traders around the world knew that the European Central Bank (ECB) would announce their rate decision last week.
If you zoom in on the fifteen-minute chart below, you will see the hours leading up to that rate decision. As you can see, the EUR/USD pair was trading in orderly trends. Then the drastic, unpredictable moves hit…
Trade the Trend BEFORE the Announcement…And
Get Out of the Way Around the Announcement!
Click here to view larger image
I love trading in the “boring” hours before the rate announcement. The market is relatively calm so you can ride trends up or down, and grab multiple winners in a row just by sticking with the overall trend.
The “Herd” Wisdom…and How New Traders Mess This Up!
Now keep in mind: This is my personal secret. Most traders do NOT do this. In fact, the “herd wisdom” is to trade as soon as central bankers release their actual interest rate announcement – so you can catch “the big spike!”
The novice “news-event traders” always want to trade the actual interest rate announcement the most. They have absolutely NO desire to trade before the rate announcement because they don’t see a lot of opportunity in those “boring ranges and very mild trends.”
However, as you’ll see from the chart above, trading the announcement can be the most dangerous time for a trade.
When central bankers speak, tons of traders are listening and reacting. So the FX market jumps and whipsaws. That can kill your trade quickly even if you did choose the right direction for your trade.
The big institutional traders know this. That’s why they’re patiently waiting on the sidelines for the dust to settle.
So the BEST time to trade the pair is in the hours a day or so before the actual rate announcement. The WORST time to trade is right around the announcement.
Your Second Chance to Cash in on the Rate Announcement
Now let’s switch gears for a second.
Say you don’t know what central bankers will do at the next rate announcement so you don’t know whether to buy or sell. Or you simply miss the window and can’t trade ahead of the announcement.
You still have a second chance to get in on the gains.
The second best time to trade is long after the interest rate announcement has hit the news. This is usually after the market forms an opinion about the rate announcement.
In other words, most traders have decided if the rate announcement is good or bad for the currency. This process can take several hours.
However, after a few hours, the market has usually decided its direction and will start trending in a certain direction again.
Once you can definitely identify the trend, then you can trade in that direction.
So the lesson here: allow a few hours to lapse after central bankers announce rate decisions. Then start tiptoeing back into the currency market.
Also, if you trade in the hours leading up to the announcement, you can rack up gains during the “boring” times when currencies are likely to be profitable and more predictable.
If you learn to trade around central bank announcements, you can shoot for multiple winners in a row, while the other novice traders just follow the herd…and get burned.
Have a Nice Day!
Sean Hyman, Professor FX
Editor of Currency Cross Trader
Blog: Secrets of the Forex Market
EDITOR’S NOTE: This is just one of the personal secrets that Sean uses to recommend the best currency plays for his Currency Cross Trader subscribers each week. For an insider’s glimpse at how to copy his strategy (and turn every $400 into $1,276 in the next eight weeks), be sure to check out his latest video.
Other Posts from the Author
- What's happening in Greece could happen in America if we're not careful! - February 15th, 2012
- Oil Heads Higher as Super Tankers Stop Shipping Iranian Oil! - February 14th, 2012
- Revisiting the Iraqi Dinar Issue Again... - February 13th, 2012
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