One of the major forex news that comes out each month is the interest rate. You can either trade interest rate using the non farm payroll trading strategy.
Or you can use this Interest Rates Forex Trading Strategy here to trade the Non Farm Payroll News as well.
HOW DOES THE INTEREST RATES AFFECT THE FOREX MARKET?
When I was a new forex trader, just starting out, sometimes I would be in a trade and suddenly the price makes a massive move either up or down and I used to wonder what was going on in the market.
In some cases, I would have been in profit and was happy with my profits and then all of sudden, my profits gets wiped out by the quick lightning speed market movement.
At other times, I would be in a loss and suddenly, there’s a sudden burst of profit as the forex market moves in favour of my trade.
The amazing thing is I used to get caught out by surprise as I did not know what was coming into the market.
One time, I nearly wipped my forex trading account when a forex news came out and the market moved so fast and moved past my stop loss without triggering it. The forex broker eventually close that trade down. I think I traded only 1 standard contract but lost $3000 in the process in a matter of minutes.
So in answer to the question: how does interest rates affect the forex market? The answer is: big time!
You see, traders and investors pour their money into countries with high interest rates so they can get a piece of the return.
- So if a country’s interest rates go up, interest in that country’s currency goes up which means that that country’s currency has more demand so people buy more of that.
- If a country raises interest rates over a long period of time, this can cause an extended trend against other currencies.
- Money just continues to pile into these currencies until there is any indication that the party might end soon
Forex interest rate announcements are some of the big currency market moving news every month. The only way to be aware of when these forex news come out is by having a forex economic calendar.
The forex economic calendar tells you when, what date and time, a major currency news is going to be out so you will not be caught by unexpected market movements when that happens.
INTEREST RATES FOREX TRADING STRATEGY-THE RULES
Here is a forex trading strategy which you can use to trade the interest rate news announcements.
The concept and the trading rules fore the interest rate trading strategy are really simple:
- unless you are a time traveler or a prophet, you will never know if the market will react to the interest rated announcement by going up or going down.
- usually, the market would be traveling in a tight range before the interest rate news comes out.
- so just a few minutes before the news comes out, you place two open two opposite market orders at the same time to catch the breakout whether up or down when the news is released.
- one trade is expected to be be a losing trade and the other trade is expected to be a winning trade.
- it is also expected that whichever the winning trade is, that trade will be sufficient to recover the loss of the other trade and end up with some more profitable pips.
Here are the interest rates forex trading strategy rules:
- switch down to the 1minute forex chart at least 15-30minutes before the interest rate news and identify the range.
- then at least 3-5minutes before the interest rate figure is released, take two orders: one buy and one sell order.Now, why would you take two opposite orders a few minutes before the news?The spread usually tends to increase significantly before the interest rate numbers comes out, therefore getting in a bit early allows you to avoid having to pay for so much spread and another reason is if you get in a bit early, and hopefully you get in mid range, your stop losses would be roughly half that of the range (in pips) instead of like the non farm payroll trading strategy where your stop loss would be equal to or slightly little bit more than the range.
- Place you stop loss at least 5-10 pips outside of the range. Why 5-10 pips? Here’s why. When you place your stop loss too close, there’s a chance that your stop loss will be hit because of the widening spreads when the the interest rate figure is released.
- For take profit target: multiply the range by 3 (3xrange) and that should give you a reasonable profit target level.
- Obviously, because you’ve entered 2 opposite trades just before the forex news is announced therefore one of the trades will suffer a loss and the other will be profitable (hopefully there’s no wild whipsaws that will take the stop loss out for both orders…). The idea is that whichever profitable trade that results will be sufficient to cover the loss of the other side trade and still give you a reasonable profit.
ADVANTAGES OF THE INTEREST RATES FOREX TRADING STRATEGY
- You can get 50-150 pips profit in a matter of minutes
- this can have the potential to increase your forex trading account fast.
- very simple forex trading system easy to understand and implement-no complicated trading rules.
DISADVANTAGES OF THE INTEREST RATES FOREX TRADING STRATEGY
- Your main enemy would be the price whipsaws and spikes…this can knock out the stop loss on both opposite side orders and you’ll be left with no profitable trade but twice the loss:instead of suffering a 13 pips loss which you planned for, you may suffer a 26 pips loss because you have both trades stopped out.
- Wider forex spreads during interest rate news announcement can also knock out your stop loss. That’s why its advisable to at least have larger stop loss…place your stop loss too close to the outer fringes of the range and you have high potential of getting stopped out.
- With this forex strategy, one side trade will always be sacrificed at a loss.
YOU CAN WIPE OUT YOUR FOREX TRADING ACCOUNT TRADING INTEREST RATES NEWS
One main reason why many forex traders don’t trade news is because its too volatile and they probably consider it it more like gambling.
- I’ve had my experience in nearly wiping my forex trading account trading the news when my stop loss was not triggered due to the market moving too fast my past my stop loss. Was it my fault or the forex broker’s fault that my stop loss was not triggered? Personally, I expect the broker to fill my stop loss order and get me out of trade and it did not.
- Best advice if you want to trade news is go very small. To Minimize Trading risk, you need to allocate a very small percentage of your trading account for trading the news. So if the trade does not go as planned, you will not spend a sleepless night over a small manageable loss.
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