How to Trade Interest Rates

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Video Transcription:

Hello traders. Welcome to the news trading course and the third module in news that moved the market profitably enough for us to trade. In this lesson, I’m going to teach you how to trade the Interest Rate decision or the Federal Fund decision by the fed. Remember that this economic event happens eight times per year and it is accompanied with a FOMC statement which we have to pay close attention to. Because it is in the little subtleties of this statement that we are going to find our trade, if the interest rate has not been hiked. If the interest rate is hiked, we are going to immediately buy the US dollar, but that’s not the case so we’re going to go to the economic calendar. I’m going to show you the graph of the past decisions then we’re going to go to the MT4.

So this is the Forex factory economic calendar. What I’ve done here is I’ve filtered out everything but inflation in Central Bank news and of course, I have only chosen to filter in high impact events and as you can see here, we have on April 29th, the FOMC statement and the Federal Funds rate.

Trading Interest Rates

Now, let’s check out the graph of the past decisions and as you can see are the previous decision and what’s to maintain. The federal front rate below 0.25%, the forecast was to maintain it and it actually happened. The Federal Funds rate was not hiked but there was an FOMC statement released with it. And as you can see, this is the Federal Funds rate graph from 2004 to 2015. You can see that from 2004 til 2007, the fed only hiked, every single meeting, the Federal Funds rate. Then, the economic crisis happened and you can see that we went all the way from above 5% interest rate to a 0.25% interest rate and the fed has kept it since 2009 til today. What this means is that before the interest rate was lowered to the actual levels, the US economy was in a very good shape. Then you can see that when the economic crisis hit, the interest rate was being lowered at every single meeting.

Now, this gives you an overall feeling of what this number means or what this economic event means or what the Federal Funds rate means. If the US economy is improving, we are going to see a hike in the interest rate. If not, we are going to see the fed keeping the rate at lower than 0.25% for a further look at the economy.

How to trade federal rates

Now let’s go to the MT4 platform on April 29th at 9 p.m. and we’re going to look at the Euro-US dollar. Here, we have the Euro-US dollar on the one minute chart and as you can see, I already have the time of the release marked on my MT4 platform. We are going to go to the hourly to look at some levels because we need levels to trade this event. Now the first level that I can see is this level of resistance right at this height, right before the event and if we go to a four hour, we might find some other levels right here. We can see that, we have some strong levels of resistance that might be tested as support and if we go even further, you can see that an actual level of support is right here.

So this is what you need to do. You need to always look for these levels because these are the levels that we are going to be taking profit at. Okay? Remember that when we trade in the news, we look for and only look for very short term momentum and we look for these levels to take profit because it is most certain that we are going to encounter an opposite force or an opposite reaction to these levels. Meaning that, let’s say the price moves lower and hits this level, we are going to find buyers here and it doesn’t matter if they’re real buyers or short sellers just covering their position, their reaction in price is the same. Price is going to start moving up or is going to stop at those levels.

This is the four hour chart and what we’re going to do is we’re going to go back to the one minute chart because we are going to look at how we would have traded this event. Remember that it is very likely that the interest rate is going to remain unchanged, which means that this is going to be immediately bearish for the US dollar, which means that we’re going to look to buy the Euro-US dollar.

Remember that what we’re going to focus is on the actual statement of the FOMC and on the April meeting, Janet Yellen which is the fed’s chair, at her press conference went through the point of this statement. She said that a possible hike in the near future might happen and they remove the word “patient” from the statement, which means that they no longer see an interest rate hike, as something which is out of the question. Which is immediately bullish for the US dollar and this is why we’re going to look to sell the Euro-US dollar, even if the Federal Funds rate which maintain under 0.25%. That’s why the FOMC statement is important. So every time you want to trade this event, you have to look for the press conference to hear the points. The actual event happened at 9 o’clock, my MT4 platform’s time, so what we want to do here is we wanted to sell the Euro-US dollar. You can see that we were on a very steep up move from these lows to these highs and we hit this area of resistance. Then we broke to the downside and right here guys, right here… let me get just get rid of this. Right here we have a moment or a period of consolidation.

You can see right here that we have a period of consolidation where we break to the downside. When we break to the downside and the announcement was made, we either wait for a re-test of these previous lows or a period of consolidation. You can see that we have a period of consolidation right here. Since we’re going to try to sell the Euro-US dollar, we are going to put a pending order below the period of consolidation. Now, let me just modify my horizontal line and we are going to put our stop losses below the previous high, which is this one right here. So we have a 16 pip stop loss. Remember that our targets are all the way down here. This is the targets that we thought of or that we encounter on the four hour chart but to be honest guys, we do have on the one minute time frame a very strong level right here. You can see that this low is a sign of support that was tested right here and we have another level on the one minute, okay?

So you can always look for… well if the levels that you find on the one hour chart or the 50 minute chart are too far away, meaning that well this level was 100 pips from where price was trading before the announcement. You can always look for previous and you have to look for previous levels.

The first thing we’re going to do is we’re going to take half of our position right here, at the previous low, and this is because one, it is the previous low of the move up and two, because this support was already tested twice. You can see the price moves all the way through it and we take full profit at this low for a nice 45 pip win with a 16 pip stop loss which means, that we had a better than a one to two or a two to one risk to reward ratio and this is how you’re going to trade. You can see that even though the fed remained very dovish, vis-a-vis this economic event, the future of a rate hike might be near because of what Janet Yellen said on the press conference about the FOMC statement and a possible future rate hike on the next meeting.

So this is how you’re going to trade this economic event and of course, you are always going to wait for the first move and then you are going to look for the period of consolidation or the correction to the upside. Now, the period of consolidation here is easily spottable because of this very small, bullish candle right at previous levels of resistance. You can see that this level was strong and tested as support and then as resistance and the momo scalpers are only going to trade this bull, a 1230 pip move to this previous level and they’re going to start taking profit. This is where you’re going to see some very small bullish pressure and a period of consolidation before you can trade the overall move to the downside.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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