Interest Rates Are Prime Forex Driver
One thing that Forex traders forget is that there is a prime driver for most movements in a currency.
Look at Stocks as an example. We know that earnings play a large part in price performance as well as the overall outlook for the company.
Futures looks at the price of whatever the underlying is. If oil supply is to be cut, we can expect to see higher prices if demand continues going upwards.
Forex is different
The movement in a currency is dependent on some economic factors such as
- Job growth/decline
- Natural or man made disaster
- Election cycles
One of the largest drivers is interest rates.
Interest Rate Information Drives Price
If a country is to raise their interest rate, we can expect to see a demand for that currency…at least in the short term.
The economic growth overall of a country still plays a part in the long term currency interest.
I want to show you why you should never ignore interest rate release (Forex Factor has a good calendar) and for this example I want to use a current release: USDCAD
The USDCAD Forex pair has been in an overall downtrend that started in early 2016 and in April of 2016, the turning point that lead to the last push was broken.
After that, price drifted higher inside of a trading channel. There were trades available on the daily chart (this is a weekly chart) but a move in either direction was short lived.
Canada started talking about an interest rate hike for a while (a few theories are alive as to why including U.S. rate hikes) so we can assume that traders were already getting long CAD.
The red arrow is 3 weeks before the rate announcement and it’s obvious that traders (and others) were listening as that is the largest momentum candlestick we’ve seen in over a year. It’s safe to say that the rate hike was already being “baked in” the USDCAD price.
The last candle on this chart is the current weekly candle of the week that announcement was released.
Can You Trade Interest Rates
Retail traders can expect slippage and spread increases when these releases are done. Trading the actual release is not something I ever do…or have ever done. The professional traders I know sit aside as well.
So how do you trade these? Price action and trading structure.
This is the daily chart and what you want to notice is the red arrow. Previous support tests were met with strong bullish action that bounced price. Even the shadows of previous tests pointed to USD interest over that of the CAD
This is different.
Price is basing at support and even with the failure test (the long lower shadow), price was not making any upwards movement. There’s even a momentum candles in this trading range that matches that of those from the earlier break right above the basing zone.
You can enter anywhere in that range (perfect entries do not exist) and use an ATR stop to protect yourself against upside moves.
The key is….price action and the structure gave you a heads up of the probable direction.
If you were aware of the rumors that the hike was coming, you may have had this on your radar. I actually covered the USDCAD in my free weekly Forex signals.
Although I did highlight it as more of a learning tool, I know some traders were already positioned before this momentum move down after the rate release.
2 Swing Trading Strategies You Can Use
Could you have been positioned before this large move? Absolutely. I am going to cover two simple swing trading strategies you could have used to be short the USDCAD.
I will walk through this trading strategy and you can read more about it: 20 SMA with RSI Swing Trading System
- Price has broken the 20 SMA which indicates we are looking to short
- Price pulls back to the 20 SMA and RSI has peaked over 50
The red arrow shows the candlestick we would short once price broke its lows. The trade was tested but price formed a double top which made the probability of our trade going in our direction. This entry with exit at the last candlestick low would have been 773 pips.
You would NOT have gotten out at the low but you can see the potential.
Here is our second strategy that could also be used.
This is another simple Forex strategy called 34 EMA With Trendline Break
- First part of the trading setup is complete when price breaks the 34 EMA
- The second part of the setup is price breaking an uptrend line and that is complete
The trade entry is at the red arrow.
We are looking for a candlestick to put in a higher low than the previous candlestick. If price kept rallying, we would trail our entry up until triggered or setup is invalid.
Trading Strategies For Big Price Movement
If the USDCAD was not on your radar, you would have known that an interest rate announcement was coming. This may have allowed you to use a trading strategy to get involved in a position before the release.
Interest rate rumors are not a bad thing if you can justify the reason for a hike or not. In this case, it was no secret and you may have applied a strategy and gotten involved long before the release.
That…is great trading.
