Central Banks are at the center of economic policy. They dictate money flows in regional economies and their powers can be used to facilitate or restrain growth in an economy. They are pivotal in shaping the overall economic landscape. Therefore it is important for binary options traders to have an understanding of the mechanics of Central Banks if they want to build a strategy around them.
The chief weapon at the disposal of Central Banks are Interest rates. Rate reductions can be used to fuel economic growth while conversely rate rises can be used to slow down an overheating economy. The major Central banks adjust their rate policy at fixed monthly meetings. Naturally these meetings attract a huge amount of attention from traders, as the expectation of both imminent and longer term rate changes can see huge market moves.
While rate decisions themselves spark increased market volatility when announced, the expectation of rate changes can prove just as significant in determining overall market direction. Markets are forward looking in their valuations, so any hint of a rise or a cut will have implications. Currencies are particularly sensitive to rate changes. Any changes in rates will quickly see one currency dumped in favour of another.
Trading Central Bank Statements
Formulating a trading approach around Central Bank announcements is essentially a form of news trading strategy. Many of the same considerations that you need for a general news strategy are required will be required when following the news and announcements of Central Banks.
The first thing to understand is that statements and rhetoric from central bankers can be unpredictable. This means volatility is high around the release of any statement or minutes. need to dig deep into any minutes to understand the underlying message. Often it can be worth while letting the dust settle for 10-15 minutes following any announcement to get a true picture of market direction.
The second thing that you need to do is limit your risk. Heightened volatility often brings about big swings. These can catch out the unwary and unprepared trader. As well as letting the market settle always need to define your risk before you trade. Plan your trading before the announcement (your risk, entry levels, stops etc) and then make sure you stick to your plan!
Thirdly, it is important to make sure you have the right tools. These will give you the best opportunity to profit. You can find out about rate announcements in a good economic calendar in advance of their release. This will give you the opportunity to plan your trading.
Also. think about the contracts you use. Touch binary options are good because you don’t necessarily have to predict the market direction correctly to profit. If you are entering shortly after the news event you can often profit from these contracts by taking advantage of the volatility. On many occasions they will end in the money simply from being triggered from the price spikes surrounding such events.
Key things to think about when creating a strategy around Central Banks are:
- Actual Interest Rates and Rate Expectations: Knowing the rate differential between different currencies can be a use predictor of value of likely price direction. Lower rate expectations can fuel Stock prices while at the same time decrease the demand for a currency against its peers.
- Rate Decisions: Monthly rate decisions from Central banks tend to be times of higher than usual market volatility. If rates are in line with expectations markets tend to continue their prior trends. A sudden surprise increase or decrease in rates can case major buying / selling. It will generally see the beginning of a new trend.
- Meeting and Minutes: The minutes that accompany Rate decisions are as important as the decisions themselves. Markets will be looking in the text for clues to future policy. A hint that a rate may go up or down can be more dynamic in market terms as the actual rate decision itself.
- Speeches: Leading members of Central banks will address business leaders and governments at regularly scheduled speeches. These often contain clues as to where future policy may lead. These can prove an early indicator of direction that rates may move. Therefore it is important that these are followed and monitored for clues to policy direction.