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How to Trade FOMC news? – FOMC Forex Strategy

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Forex trading news is an integral part of the currency exchange market, as it helps traders and investors to stay up-to-date with market movements to make more informed decisions. News about global events, such as elections, geopolitical turmoil, central bank meetings, and more, can all impact the forex market.

Furthermore, economic data from around the world can provide timely information to investors and traders to help them anticipate price movements and capitalize on potential opportunities. By staying attuned to forex trading news, investors and traders alike can better manage risk, identify trading opportunities, and plan their currency exchange activities more effectively.

Currency traders must recognize the importance of keeping updated with relevant financial news. Financial reports from individual countries provide insight into how economic activity has been performing in that country which can influence future changes in the value of a particular currency.

forex calendar

 

You can use our forex calendar to monitor important forex news, FOMC reports, and NFP.

When a government releases data below expectations or shows signs of weakening economic performance, these changes can cause investors to become nervous and sell off their investments quickly.

Therefore, having up-to-date knowledge of financial data releases is essential for traders looking to capitalize on shifts in exchange rates. Moreover, political news can also significantly impact currency prices; when there is uncertainty related to an election or political situation in a particular country or region, this can often lead to increased volatility in markets, which then provides additional opportunities for active traders.

In addition, being aware of important events like central bank meetings or interest rate decisions by major central banks worldwide provides invaluable insight into potential price action for many currencies.

Central banks often publish minutes from their meetings which give detailed information about policy decisions and goals for growth within their respective countries which then influences investor sentiment and ultimately determines whether foreign exchange prices will rise or fall globally. Finally, being informed about international events like trade wars between nations or other significant geopolitical events can significantly influence markets’ near-term and long-term outlooks.

Therefore, staying up-to-date with forex trading news is critical for investors who want to make well-informed decisions about when to buy or sell currencies to maximize returns while minimizing risk levels. By following relevant financial news sources regularly and identifying potential opportunities before they occur, savvy traders can take advantage of profitable trends before others even know what’s going on in the market!

One of the vital news is FOMC monetary news.

What does FOMC stand for?

The FOMC stands for Federal Open Market Committee and represents a Federal Reserve System branch that directs open market operations to determine the monetary policy’s direction.

What is FOMC?


FOMC, or Federal Open Market Committee, is a board of governors with seven members and five Federal Reserve Bank presidents. The main task of the FOMC is to control monetary policy.

The Federal Open Market Committee (FOMC) is a branch of the Federal Reserve System that plays arguably the most crucial role in setting economic policy for the United States. The FOMC consists of twelve members, seven from the Board of Governors and five drawn from Reserve Banks. This committee meets eight times per year to discuss monetary policy and make decisions regarding interest rates, purchases of securities, and other tools used to influence the money supply and credit conditions in the economy.

Given its position as one of the most influential economic bodies in the country, citizens must understand how the FOMC works. The FOMC’s primary mandate is to maintain price stability and full employment. To do this, it sets short-term interest rates by adjusting the amount of money circulating through the banking system. By increasing or decreasing this amount, they can encourage borrowing, which leads to increased economic activity and vice versa.

Moreover, they can purchase certain types of securities on open markets, such as Treasuries or mortgage-backed securities, as part of their policy toolkit. They are doing so influences market conditions by increasing or reducing liquidity available to market participants depending on whether they are buying or selling securities. All these actions have effects that ripple throughout financial markets worldwide, influencing currency exchange rates, stock prices, bond yields, and more.

In addition to setting monetary policy via the actions discussed above, members of the FOMC also use communication tools to share their views on current economic developments with Congress and public markets at large. Through statements released at regular meetings or press conferences following them, members seek to clarify expectations about future monetary policy moves – ensuring that all stakeholders understand why certain decisions were made or what trends might indicate going forward. This helps investors plan long-term strategies but also gives ordinary citizens a way to stay abreast with policies affecting them directly and indirectly daily.

 

What does the FOMC do?


FOMC, or Federal Open Market Committee, conducts monetary policy for the U.S. central bank and acts as the Federal Reserve System’s economic policymaking body.

The Federal Open Market Committee, or FOMC, is the policymaking body of the Federal Reserve System, responsible for carrying out the nation’s monetary policy. This committee meets eight times a year to determine the economic and financial conditions that affect their decisions about setting short-term interest rates.

The FOMC was created in 1933 under the Banking Act of 1933 and consists of twelve members: seven from the Board of Governors and five from among the Presidents of Reserve Banks. The President chooses the Chairperson or Vice-Chairperson and is subject to Senate confirmation. The FOMC’s primary mandate is to promote maximum employment, stable prices, and moderate long-term interest rates to foster economic growth and stability.

To achieve these goals, the FOMC conducts monetary policy through three primary tools at its disposal: open market operations (the purchase and sale of U.S. Treasury securities), discount window lending (which provides funds to eligible depository institutions), and reserve requirements (which regulate how much money banks must hold). The FOMC sets monetary policy by adjusting these tools to meet its goals. For example, inflation may restrict access to discount window loans or raise reserve requirements to reduce financial liquidity if inflation rises too quickly.

The FOMC also works closely with other parts of the Federal Reserve System on various projects, such as research into new forms of payment systems and methods for conducting stress tests on large banking institutions. Additionally, the committee helps advise on foreign exchange rate policies and international financial stability initiatives such as Basel III capital regulations for banks worldwide.

Finally, one of the most critical functions performed by this committee is guiding future actions; this gives economic participants an indication of what may be coming down ahead and allows them time to prepare accordingly for any potential changes that could affect their plans or investments.

At each meeting, members discuss current economic conditions based on reports from regional Fed Bank presidents and statistical data, which they analyze thoroughly before deciding whether they should alter their current stance on monetary policy or keep it unchanged in light of new information. Following this discussion, each participant votes for one of four possible outcomes: approve a policy change; no change; wait for additional information, or take no action until more data is analyzed and discussed further during another meeting.

Overall, it is clear that FOMC plays a critical role in helping ensure that America has a strong economy supported by low unemployment levels while maintaining stable prices despite changing market conditions throughout different cycles. These efforts help build confidence among businesses looking to expand operations while allowing consumers to feel secure when making purchasing decisions knowing their money will have purchasing power over time with minimal fluctuations overall due largely thanks to this committee’s efforts towards promoting both sustainable growth and financial stability across our nation’s markets today.

 

Why is FOMC meeting important for traders?

The FOMC (Federal Open Market Committee) is an important day on every trader’s economic calendar. This particular meeting is conducted eight times yearly, and all the traders must prepare for it. In the subsequent paragraphs, we will explain how to trade FOMC.

The essential gauges of the United States economy’s future, the FOMC meeting can produce a significant market movement before and after it happens.

How often does FOMC meet?

FOMC holds eight regularly scheduled meetings during the year, around one about every six weeks, and other meetings as needed.

Therefore, the question is how you can take advantage of this meeting and use it as an integral part of your trading policy. Your initial step will be to be fully aware of what is at stake in the meeting and what opportunities can be generated from the conference.

We have assembled all this information in the subsequent paragraphs to help you plan for the future.

What Is Going To Take Place In The FOMC Meeting?

As many as seven governors of the board are going to participate in every FOMC meeting, and 5 Federal Reserve Bank presidents will discuss and decide on the economic United States’ monetary policy mainly two purposes for this meeting: one will be to review the present financial information, and the other will be to decide what type of intervention will be required.

The committee’s decision will consider vast amounts of information, including fixed investment, household expenditure, employment growth, and inflation. Although the meeting will be held privately, significant decisions will be declared immediately after completing the press conference meeting.

Three weeks following the completion of the meeting, the minutes will be published in full. The conference intends to stabilize the United States economy by increasing or diminishing interest rates.

The committee members can use much financial information to evaluate whether they would like to drive or slow down inflation regarding the supply of money and the target inflation rate of 2%.

It is a fact that the FOMC happens to be a significant indicator of the US’s economic health. The traders can use the committee’s decision to provide a broader context for their trading techniques. The decision of the FOMC can impact these particular trading instruments directly. The FOMC, together with the Nonfarm Payrolls Report, helps to indicate the present condition of the United States economy. Traders might use the committee’s decision to provide a broad context for their marketing policies. The decision made by the FOMC directly impacts some trading instruments, which are as follows:

Dollar: If the FOMC decides to enhance the interest rate, there might be an increase in demand, and the dollar’s value is likely to increase as well. Demand can increase if the FOMC decides to enhance the interest rates, and the dollar’s value might also increase.

  • Gold: If the dollar becomes vital because of higher interest rates, it might decrease gold’s value. The traders can flock to gold if the meeting result shows a negative outlook for the US economy since it will be visualized as a stable asset that can hold its value during a turbulent period.
  • Indices: The share prices can go down in the event of any increase in interest rates, which implies that the US indices are subject to movements because of speculation.
  • Bonds: There might be an overall fall in the bonds due to enhanced rates of interest. The US economy happens to be the biggest economy on the planet, and therefore it is possible to feel the repercussions of the decision of the meeting globally.

Traders worldwide will focus on the decision, which will indicate the economic trends throughout the world and understand how other central banks can adjust their inflation policy.

Potential opportunities for trading can be opened up by this volatility surrounding the decision of the FOMC. In particular, their strategy might be adopted by the day traders to optimize the shifts that take place before and after the conference.

It is common to have speculation several weeks before the announcement, implying that the markets might be prepared for any outcome. It is essential for those who like to stick to long-term trading patterns to keep in mind that the decision of the FOMC might take a significant amount of time to influence the economy fully.

It might be possible for the traders to optimize the movements irrespective of the result by figuring out a trading technique that accounts for each meeting.

FOMC Forex Strategy

FOMC forex strategy is based on news strategy trading where traders can enter the market 5 minutes after FOMC news or when the hourly candle is closed.


There are two strategies that I use to trade FOMC news :

1) 5 minutes strategy when FOMC news is unexpected and when I see a strong price move.
2) Hourly close strategy based on the overall trend and FOMC news.

Scenario 1: Strong move FOMC Forex Strategy

If an unexpected FOMC decision causes substantial volatility, I trade after 5 minutes (5 minutes after the news). As you can see in the image, I will buy after five bullish candles close and stop loss to be low that 5-minute candle.

5 minutes FOMC forex strategy

Scenario 2: Unclear move FOMC Forex Strategy

In this case, if there are no changes in interest rate, I do not trade using 5-minute charts and do not hurry in trading. I watch hourly close, then trade based on an overall trend and volatility. I follow the primary trend and want to see an increase in volatility.
Examples from the last FOMC decisions :

FOMC decision GBPUSD chart June 2019
This chart shows a bullish trend and no changes in direction after the FOMC release. I followed the primary trend and made a buy order after the FOMC decision.

FOMC decision in May 2019 GBPUSD chart example
In May 2019. Federal Reserve officials agreed to “keep their benchmark interest rate unchanged at a target range of 2.25% to 2.5% and signaled comfort that their wait-and-see posture had steadied the economy after fears of a slowdown had sent markets reeling at the end of last year”.
USD started to be stronger, but there was no strong push below or above because the interest rate was unchanged. I waited hourly close to enter into trade. I made a SELL trade and put a stop loss on the price high just before the FOMC meeting.

Discussion about FOMC forex strategy

FOMC Forex Strategy is a popular strategy used by forex traders to capitalize on the news released by the Federal Open Market Committee (FOMC). This committee releases economic data related to interest rates, quantitative easing, and other economic indicators directly impacting currency exchange rates. By understanding how these factors influence exchange rates, traders can create an effective trading strategy to capture profits in the forex market.

When FOMC news is unexpected, a 5-minute strategy may be employed when you trade FOMC trading news. Traders should quickly assess the information and determine its overall sentiment and direction. If it is seen that there will be significant price moves due to the news, then the trade should be executed quickly to capture profits in the volatile environment. The most important part of this strategy is anticipating the price’s direction before taking action.

In addition to a 5-minute strategy for reacting to unexpected FOMC news releases, a close hourly strategy can also be used as a longer-term trading approach. This technique involves waiting for the close of an hourly candle before entering into a position based on an overall assessment of market sentiment and available news from the FOMC. This allows traders additional time to analyze market conditions and make informed decisions about potential trades without reacting instantaneously.

When using either of these strategies for trading FOMC announcements, it’s essential to keep track of current events and understand how changes in interest rates or other economic factors may affect currency exchange rates. Risk management techniques such as stop loss orders or trailing stops should consistently be implemented to protect against any unexpected losses due to unfavorable market conditions or otherwise unanticipated outcomes from FOMC announcements.

In conclusion, employing FOMC Forex Strategies can help traders take advantage of sudden movements in currency exchange rates due to Federal Open Market Committee announcements. Depending upon their level of experience, different strategies such as 5-minute reaction trades or hourly closing analysis may be used to maximize profits while managing risks appropriately. However, as with any investment activity, proper research and caution should always be taken when trading forex markets to ensure profitable returns with minimal losses over time.

Conclusion

The FOMC (Federal Open Market Committee) is essential in every business person’s financial calendar. This meeting, which takes place as many as eight times yearly, typically results in substantial market movements before and after the event. The question that might arise is how it will be possible to use this meeting as an integral part of your marketing policy. Below, we have mentioned all the essential steps to trade FOMC meetings effectively.

Throughout the world, traders will be focusing on the decision made by the FOMC as an indicator of global economic trends. In contrast, the inflation strategy adjustments made by the other central financial institutions will also be reflected.

The minutes will be published in full three weeks after the completion of the meeting. The FOMC will attempt to stabilize the economy by lowering or elevating the interest rates.

What is Order Block in Forex? – Order Block Trading Strategy

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Retail traders are increasingly active in anticipating price fluctuations and considerate marketplace subtleties. Twenty to thirty years ago, central banks and economic organizations could influence markets without ordinary traders knowing. Retail traders may now join the large guys and utilize block orders with advanced trading platforms and tools. This article explains forex order blocks, how to recognize them, and the order block dealing technique.

What is Order Block in Forex?

Order blocks represent high-volume orders from big trading institutions such as central banks.  On the trading chart, order blocks can be seen as high volume supply and demand areas that can create strong bullish and bearish trends.

what is order block gbpusd example

Trading blocks on charts are areas of high or low demand or supply.  These “blocks” are special orders that financial firms and central banks employ to buy and retail valued possessions that ordinary people may put to practical use.

Please watch my video about Order Blocks:

Central banks usually divide their orders into chunks. Then they continue in this manner until they have completed their mission. If a central bank has to acquire 500 million euros with US dollars, they may do it in more than 3-5 transactions.

Furthermore, they frequently employ complex orders to conceal their market participation. For instance, even though they have a thousand, they place a single order on the buy or sale side. Because of this, reserve banks may achieve their aim without increasing market volatility or dramatically altering prices, as it is confidential information for other traders.

Examples of Order Blocks in Forex Trading

As we’ve already discovered, order blocks are groups of orders placed by central banks, governments, and big trading institutions.

For example, important economic news or intervention represent typical order blocks like on EURCHF:

order block example eurchf

With the help of market data at level 2, you may spot them if they consistently place large orders without considering the pricing. Buying a significant quantity of an asset within a tight price range is standard practice for central banks. Please read more in our article on how banks trade forex.

trend trading distribution - Bank trading strategy phase

Let’s assume, though, that you’re only accessing market Intelligence, Level 1, and relying heavily on trade charts to understand the underlying structure of the market. This calls for the analysis of price charts to determine if we are in an aggregation or dispersion phase. A bullish order block is the first, while a bearish order block is the second.

Bearish USDCHF Order Block

Suppose a central bank is entering the market to sell the counter currency and enhance the value of its currency as part of the reverse currency war. This USD/CHF (U.S. Dollar/Swiss Franc) example serves as a bearish order block.

In two days, US and Swiss increased their interest rate in the middle of June. The Swiss central bank surprises the market with the first rate hike since 2007.

USDCHF order block example bearish trend

 

The use of order blocks is a novel trading approach that may be implemented by investors seeking market direction. By revealing what banks and other financial organizations intend to do in a specific market, it can help traders predict the direction prices will go.

How to determine Order Blocks on the chart?

  • Use volume indicator

Combining volume indicators is another critical consideration when implementing order block trading techniques. The goal is to identify whether or not a significant actor accumulates the asset in question inside a specific supply or demand zone and whether or not the accumulation phase is characterized by high volume.

We’ve already shown that order blocks provide the impression of a ranging market, but it doesn’t imply that every range is an order block. Therefore, a volume indicator should be used to verify that the trade volume is abnormal to guarantee the content is an order block scenario.

  • The range expands in direct proportion to the magnitude of the shift.

In the dissemination or accretion stage, markets frequently engage in lateral trading before shifting in the initially anticipated direction once the pile-up is completed. Remember that whenever anything like this happens, the more extensive the series, the more profound the movement will be.

Since this is the case, the Wyckoff graph arrangement and market structure are required. The trader will join the market as soon as the price cessations through either the conflict or the support level.

Bear in mind that in several situations, central banks and large institutions seek to lengthen the range period so that they can finish their purchase at roughly the equivalent level of charges and avoid dealing with significant instability and trending marketplaces. Because of this, they want to maximize their chances of finishing their purchase at the same level price.

  • Order blocks do not occur every day.

You may safely believe that order blocks are not something you can look for or use in your forex trading strategy. No one can predict when central banks or other significant participants will enter a market, and you won’t receive any warnings before they do. As an additional note, order blockages are a very uncommon occurrence.

As a result, you shouldn’t make order blocks the foundation of your trading strategy; instead, include them in your system and employ them as you gain experience spotting order blocks in the market.

Order Block Practical example

In September 2022, there was a considerable GBPUSD drop, and this pair almost hit the 1.00 price level. RSI for GBPUSD was below 20 on the daily chart.

gbpusd on 28 septembar

Bank of England decides to do bank intervention:

bank of england intervention news story

After this news, there was a significant bullish daily trend on GBPUSD and several trading blocks. GBPUSD price went up:

gbpusd recover price after intervention

 

Cons and Pros of the Order Blocks in forex

Order Blocks Advantages

  • Excellent tool to find strong trends
  • The ideal combination of fundamental and technical analysis.
  • You get information from governments and banking institutions

Order Blocks Disadvantages

  • Hard to detect Building Blocks
  • It would help if you had a technical and fundamental reason

Forms of sequential building blocks

In trading, there are two distinct kinds of order blocks, each corresponding to a specific order type.

  1. Bearish order block
  2. Group of bullish orders

1. Block of bearish orders

After a price range or block has been broken, a bearish order block will occur if a bearish impulsive wave has begun to build. Once the worth moves back into the bearish order block area, we will initiate sell orders.

2. Group of bullish orders

A bullish order block has formed when an up-trending impulsive wave occurs after breaking a range-bound market structure or block. We’ll start placing purchase orders with institutional traders as soon as the price moves back into the order block zone.

Large organizations and banks are watching order block zones closely, as we know. Orders from large trading firms tend to be placed in these areas. These price ranges should be remembered so that we will be prepared to make trades after the charge inevitably yields to these areas in the prospect. In the event of order blockages, I have outlined a primary criterion for opening purchase and retail orders below.

Put an awaiting purchase boundary order some pips beyond the bullish order block area on the chart when it appears. Setting a stop loss order for some pips underneath the region is recommended.

Place a stop loss order above the zone and a pending sell limit orders a few pips below it when a bearish order block zone appears on the chart. Remember that this is an essential order placement procedure. In the financial markets, this is not a strategy. Advanced technical tools, risk assessment, and psychological aspects of trading make up a trader’s approach.

As a trader, how can I map out a block zone for my orders?

Recognizing the price range or price block on a chart is the first step in drawing an order block.

  • Follow this by circling the extremes of the pricing range.
  • Make a horizontal line that extends between the order block’s high and low points. We can use this space as a chokepoint for incoming orders.
  • It would help if you always tried to make purchases and sales within this order block area.

Retail traders feel disappointed when their approach fails. A failed deal may not represent incompetent traders or understanding. Sometimes they lose due to liquidity issues. Institutional traders have the most significant edge in the crowded FX market. They can control market pricing with a substantial market cap. What should ordinary investors do?

Order blocks can boost your trading. Many individual investors succeed with this method to avoid liquidity searches and increase their chances of success. It may be forward-looking if you could find order blockages and use them in your dealing approach. It’s everything here.

Order blocks relate to the aggregation (when bullish) and dispersal (when bearish) of orders after fiscal organizations and banks. It reveals where established agents stack orders afore entering the marketplace. These entities are the fundamental price drivers of the market; thus, understanding their strategies will help you make trading judgments.

Using an approach that integrates institutional trader behavior may improve your odds. Institutional traders deal in large volumes. They should organize wisely. They spent countless currency on market analysis to improve trading results. Executing a large order is a new difficulty for them.

Every purchase order must have an opposing sell order. Due to their large orders, institutional traders may have trouble finding a counterparty to fulfill them. Financial institutions and other businesses sometimes divide orders into slighter agreements and carry them out in stages.

A bank needs to buy EUR 100 million/USD. Liquidity limits the market to $20 million. The bank may acquire an additional fifty million dollars in the second stage and thirty million dollars in the third. They may execute orders at the desired price without chasing the worth or disturbing the market. When $100 million is traded, the price typically jumps.

Order Blocks vs. Supply/Demand

Order blockages and supply/demand are controversial. Some sites say they’re the same. Order blocks are a form of supply/demand range. They think placing order blocks in the array association zone produces supply/demand zones. This precisely doesn’t seem right.

supply demand area forex

Supply/demand occurs in the commodities market, where maize, wheat, and soybeans are traded. When supply is low, prices increase; when demand rises, prices decrease. Forex isn’t like this.

Forex price movements seek liquidity above or below recent highs and lows. However, financial organizations heavily impact currency values, which adjust the value to appropriate locations so they may make orders. Once the price exits the order block region, it’s not because supply or demand is growing but because significant players shift it to the opposed section of the liquidity pools to retail their possessions.

Order Block and COT report

Retail traders must grasp what institutional traders do in the marketplace. The commitment of Traders (CoT) report is used for this. You should declaim the information, discover essential bits for your profession, then connect the dots. The report doesn’t include intraday activity; therefore, it’s not useful for temporary investors.

what we can check in COT report

Order blocks offer you a greater understanding of what organizations are undertaking since you can see their traces in the digital world. You’ll mark more innovative trading selections with the speedier procedure. Order blocks may be employed in many marketplaces and dealing tactics; thus, they’re valuable for numerous traders.

Finding order blocks on the chart is the first step in learning how to practice them in your dealing system. In the work of large organizations and banks, order blocks can be seen over more extended periods following a market association. Generally, consolidation zone candles are more minor than Order block candles.

The best way to monitor what big trading institutions do in the forex market is to monitor the COT report.

Watch for a bearish candle before a significant bullish advance to detect order blockages in a bullish market. Once you notice order blocks, you can change them contingent on the price’s direction. Not every order blocks are lucrative and likely. Observe some qualities to determine if an order block is worth employing.

crude oil cot report

If this criterion does not exist in the graphic representation, the chance of the order block is minimal, and you should reconsider your analysis in light of this finding. First, you should look for a merging array where establishments are buying (a bullish order block) or selling (a bearish order block), and then you should examine price variations.

cot report spread example

As soon as the rate arises in the opposite direction of the order block, it would help if you drew a rectangle beginning at the order block’s high and terminating at its lowest, extending its scope so that it spans the portion of the graph on the right. Ensure the price stays above the order block’s middle range.

Higher-frequency events

Higher-level temporal scales can give you a more comprehensive picture of price movement and a greater understanding of order blocks. After a strong up and down motion, blocks of order arise. After the worth exits the order block region with significant momentum, it retraces to collect market orders. If this circumstance lasts too long, the market is wandering. To what extent the price must deviate from the order block before a reversal is permitted is not specified. Still, a more extended period may assist you in viewing the better picture and deciding what to do next.

After a market shift, follow the trend.

Pay attention to bearish order blocks if the market arrangement changes and the tendency turns negative. You should enter a short position with a target price under bullish order blocks. The inverse is also true with this principle. If there is an improvement in the market’s structure, traders should look for liquidity pools that can overcome bearish order blocks and concentrate on bullish order blocks.

Conclusion

Overall, order blocks are the most efficient method for spotting and following the requests of financial organizations and banks. I strongly advise traders to familiarize themselves with and use this naked chart trading strategy in their approaches. Doing so will do wonders for your dealing profession.

In conclusion, order blocks are an excellent instrument for determining which aspects of market activity have the most significant impact. And central banks frequently participate in the foreign exchange market to influence the worth of their currencies, which positions them as substantial participants in the market. Even though this strategy is quite effective at taking in present market statistics, there is not a widespread agreement on how exactly order blocks should be put into dealing coordination.

The most prudent thing is to have this trading method close and put it into practice routinely whenever you identify accretion or dispersal zones brought about by the acts of central banks and other essential entities in the marketplaces.

After a significant purchase by a central bank or investment bank, most traders will wait for the price to break between the resistance and assistance levels before entering a position.

Although the foreign exchange market is regionalized, it is commonly recognized that central banks substantially contribute to ” deploying ” their exchanges’ values. All at once, central banks must preserve the constancy of their currency’s exchange rate, which means they cannot put a large order on the market that would scare away other market players.

Gold Head and Shoulders Pattern

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What is the Bearish Head and shoulder pattern?

The Bearish Head and shoulder pattern represents a trading pattern consisting of one lower top as the left shoulder, another highest top (head), and another lower top (right shoulder). This pattern with strong resistance usually signs a future bearish trend. 

You can now see the bearish head and shoulder pattern on this screen.

Head and shoulder pattern

And when we trade gold, we can see this kind of pattern very often on four-hour daily and weekly charts. I want to tell you, too, that there is another pattern that’s very similar to the head and shoulder pattern. It’s a double-top pattern. So you have the first top, then you have a neckline, then you have a second top, and then you have a trend break.

double top

You can see right now on the screen:

monthly gold chart and douple top pattern

Gold monthly chart. On this monthly chart, we can spot exciting patterns. We had two highs in the last couple of months, and now we are some bearish move. If you zoom in on this picture, you can see what I’m talking about. We can see two tops and some bearish moves right now that we need to describe technically and explain this in the fundamental approach. So let me see again, on the left side, we have the current double top monthly chart pattern, and I think it’s evident.

gold montlhy douple top pattern - zoom in

Whereas the first stop second top neckline breaks. And right now, we are in the moment when the neckline breaks are over, and we are in a bearish, bearish move on a monthly chart.

 

montlhy chart for gold in 2022

This summer, we have a head and shoulder pattern on the four-hour chart. So this summer can provide the potential bearish trend for the gold price.

Gold H4 chart - forex gold head and shoulders pattern today

If you go to the four-hour chart (image above), you can see in June that we have one high, then they had a head, then a second shoulder, and right now, we’re in a bearish move. Both indicators head and shoulders and double top on the monthly chart show a bearish trend. The good thing is the monthly chart bearish trend can be very, very long moved. So, we can have exciting spots to enter bearish trades all summer. Now we will try to describe this and answer the critical question why did this happen?

The interest rate in the US in the last 200 years

 

The first thing you need to know is that something has changed in the US market, and that is an interest rate hike.
We had a very low-interest rate during 1945 when the country wanted to raise the stocks and have more impact on development.

US interest rate in last 200 years

Everything that happens, there is some story behind that. As you know, the interest rate in 2008 was 2.3%, but inflation and interest rate were no problems. Fourteen years ago, there was a crisis in real estate. But when the crisis started between the two seven and two eight, interest rates fell from 5.1 to 2.3 to curtail the subprime mortgage and banking crisis. And right now, we are trying to increase interest rates because we want to fight against inflation. So what happened on March 16, 2020, when it was a corona disease? The Federal Reserve interest rate was between zero and 0.2%. On March 17, we had an interest rate rise from zero point 25% to 0.5%. And in May, just two months later, we had another interest rate rise to 1%. And this is not the end.

interest rate increase in 2022 - Table screenshot

During this year, we can see interest rate rises, and this can happen just as a tool to fight against high inflation. And on the end, what we need to know is there is a scientist that will tell you that interest rate and the gold price, there’s no impact there, and there is no strong correlation. But if you just saw this graph in the last 20 years, you can see one essential thing. The thing that I want to tell you is straightforward. You want to increase the interest rate to fight against inflation, but you want to slow down your economy. Then when you do that, one essential thing will happen. Your currency, the dollar, in this case, will be stronger and stronger.

interest rate vs gold price

When we trade gold, we know that the gold price is the ratio between gold and the US dollar. So when I say 2000 gold, gold prices. So at that moment, you know if the dollar is stronger, the gold needs to be weaker. And if you see this in 20 13, 20 12, we had a considerable gold price, almost $2,000. And as you know, the interest rates were negative. Again, if you look at 2016 and 2017, you can see just like in the mirror route. Like in the mirror, you can see the price between the gold and the interest rate. So if we increase the interest rate, there is a fundamental impact and a fundamental explanation that gold price can fall. But I want to tell you one more thing that we must be careful about if this happens. If the stock market starts to go down, more people will not invest in stocks anymore, and maybe at that moment, people will begin to invest in precious metals like gold and silver, which can make gold bullish.

And very often, after this massive downtrend of gold in some moment, if the stock market crashes, we can see the gold pricing crave, so we need to be careful because if something changes, it’s not simply on the market; everything sometimes things can be complicated we can see the different price and gold we can see the market wants to see a weaker dollar, et cetera, et cetera. So I want to tell you we need to be careful. Please watch when you invest money anywhere. This is not an investment challenge; just talking about fundamental technical analysis. When investing, you must be careful; you must think there’s always a second story, the second side of the coin.

How to Trade the News in Forex Market?

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Trading the news is one of the most effective strategies in forex trading. It’s a way to predict market movement based on critical economic events or data releases before they happen. These announcements will affect the currency rate and thus provide an opportunity for traders to make money by predicting it correctly.

Trading before big news can be hazardous, especially if you’re a newbie trader. Still, even experienced brokers don’t recommend this type of action unless you have a few years of experience under your belt. That’s because reactions may not come immediately; they may take minutes, hours, days, or weeks depending on the types of data released and how strong their impact will be reflected in the market picture.

More importantly, before taking a position because of actual news, your broker needs to assess the market liquidity. Unfortunately, liquidity is not guaranteed before significant events, so it may be risky for you and your broker if you trade just before important announcements.

That’s why many brokers offer access to economic calendars, which allow traders to know beforehand when primary data or events will happen, giving them time to prepare accordingly depending on their investing strategies. Other than that, it’s best for newbie traders to invest in such short-term strategies as trend following, mean reversion, or grid trading systems which can produce more stable profits over shorter periods.

Suppose you’re a seasoned trader though, you should consider other types of price action analysis like candlestick patterns formed around those special times. For instance, if there’s a long candlestick formed around positive data announcement, it means that the market was already expecting the outcome of this event, but then it turned out to be worse than expected. Naturally, that would result in an immediate downside movement for that pair, so you should take advantage of this change and invest accordingly.

If, on the other hand, there’s a long wick at the top of the candle, it means that after initial downwards movement, prices went back up again, indicating bullishness among traders who may make them believe that price will go even higher. Thus you can cash in on their optimism by opening a buy position instead of selling or establishing short positions near resistance levels where profit is maximized compared to entering trades at lower levels. Be careful, though, if there’s a long black candlestick after a positive data announcement. That means that the market may not be making any immediate changes, and other traders believe that price will go even lower.

How to trade the news in the forex market?

To trade the forex news before any trade position, you need to analyze daily and weekly trading charts, create an overall economy shape analysis, analyze current and expected (projection made by analysts and forex websites) trading news outcomes. You need to choose either a directional or non-directional bias approach.

Directional bias means that you already have your setup, and you decided before the news that you will buy or sell some asset. For example, you think that the European Union economy is in the wrong shape and that the US economy has rising potential. However, the current chart shows a bullish EURUSD, and you want to BUY EURUSD after the news. So, you will make only BUY trade if you see good news in your favor.

Directional bias strategy example – Interest rate increase example

The Bank of England’s Monetary Policy Committee (MPC) on December 15, 2021, voted by a majority of 8-1 to increase the Bank Rate by 0.15 percentage points to 0.25%. From December 15. 2021 we can see a bullish trend on the chart below.

Strategy:

  • Economic shape for GBP good
  • Economic shape for USD moderate-high inflation
  • Overall GBPUSD trend on weekly chart bullish
  • Interest rate decision – increase to 0.25% for GBP

BUY GBPUSD on 15. December 2021., after 1 hour or after the daily close. Put stop loss on December low price level, target open.

gbpusd chart after interest rate increase

Should I trade based on the news?

Yes, it would help if you traded based on the news, but the best way is to use it as an additional trigger. At the same time, the overall economic shape and current long-term technical analysis (chart analysis) need to support your trading decision. However, if you want to trade based on recent news (non-directional bias strategy), please do this strategy only if you trade highly uncertain trading events such as NFP. 

Non-directional bias means that you do not have set up before the news, and you are ready to enter into BUY trade if news generates a rising trend, and you are prepared to enter into SELL trade if news causes a downtrend. Usually, traders apply non-directional bias strategies when they know that there will be substantial volatility and price change, and high uncertainty. For example, the NFP report trading strategy is an example of non-directional bias. Non-directional bias can be a strategy where traders before the news make two trades – one BUY and one SELL and they wait to see which one will be realized.

Traders can trade the following news:

  • Business sentiment surveys
  • Central bank intervention news
  • Consumer confidence surveys
  • Economic growth (GDP)
  • Employment data (unemployment, wage growth)
  • Housing data (sales, construction)
  • Industrial production
  • Inflation (CPI, PCE, PPI)
  • Manufacturing sector surveys
  • Interest rate decisions by central banks
  • Retail sales
  • Trade balance etc.

The most effective trading strategy outcome can happen when traders trade Central bank intervention or interest rate news. This news usually pushes big investors and governments into the trading market. For example, see the video below with trading example:

 

In the video above, we had an example of EURDKK currency pair.

EURDKK bank intervention example

At the end of December in the new Danish government intervened weak DaDenmark’sa. Denmark’s central bank sold 47 billion kroner ($7.1 billion) in December 2021 to protect its euro peg, the most significant monthly currency intervention to weaken the krone in seven years.

eurdkk danish krona intervention by goverment

 

EURDKK interest rate cuts trading example


On September 30. 2021, Denmark Cuts Key Rate to Minus 0.6% to Defend Currency Peg. After the new release, EURDKK started to rise because DKK was weak after the interest rate cut.

eurdkk price rise on september 30 after interest rate cuts for dkk

 

Now that you know how to prepare for news trading, it’s time to talk about types of data that affect the forex market; let first, let’s analyze different scenarios depending on their nature:

Positive or bullish announcements are related to strengthening the economy, developing trade between countries, or resolving crises by offering global financial aid. So these would be things like GDP growth rates above expectations, unemployment rates below forecasts, or deals signing between two nations. All these pieces of information indicate vigorous economic activities, which usually produce bullish price movement for pairs. It would help if you looked out for a particular currency because it’s the most sensitive to these types of news and thus would move more than others.

Negative or bearish announcements are those related to slowing/reversing the economy, hindering trade between countries, or not finding a way out of crises. So these would be things like GDP growth rates below expectations, unemployment rates above forecasts, or deals renegotiation. All these pieces of information indicate weak economic activities, which usually produce bearish price movement in the forex market. It would help if you looked out for particular pairs in this city because it’s the most sensitive to these types of news and thus would move more than others.

High impact data have a more significant effect on forex pair price movement because it is easier to predict using technical analysis tools. As a result, there’s a big chance of gaining higher returns over shorter periods.

Low impact data, don’t hand, don’t move prices much, so they should be considered only if you plan to trade long-term.

Now that you know what data to look for and how to print them, it’s time to discuss where and when particular announcements will be released. That way, you can develop a list of news and events coming up in the next few days which would affect prices so you can prepare accordingly:

First, most news announcements are released by national governments, central banks, and international organizations. You can find this information on forex calendars published online at different forums and specialized websites, so it shouldn’t be too hard.

Why not just look at the economic calendar?

The economic calendar can not tell you the future outcome and can not describe the reason for market behavior after the news event. It can be hard to predict data coming out of the European Union, for instance, because it involves 27 different countries, which makes it harder to cover all the releases. On top of that European Central Bank has this habit of releasing important news after the market closes, which offers some traders an opportunity of waiting for the US session to end before even checking if there are any data scheduled.

How do national governments and central banks significant release data?

More than 300 political events are listed on  Economic Calendar, including positive and negative announcements that affect currency prices in the forex market. So you only need one or two pieces of information about the country’s country’s public accounts balance, inflation rate, interest rates, or unemployment rates to understand the importance of each event.

Is the best moment to trade just after release or before release?

The best strategy is to trade after the economic event to see market behavior and avoid slippage and uncontrolled volatility in the first minutes. For short-time trades, it is wise to wait 5 minutes, while for a longer time frame, trades at least 1 hour after the news (sometimes wait for daily close before entering into the trade). However, suppose the news is dramatically different than expected and the price is going in your favor. In that case, you should enter as early as possible and put enough broad stop loss to avoid slippage and uncontrolled It’stility.

It’s important to know that significant announcements are usually published at 8:30 am, 12:30 pm, and 3:30 pm GMT (7:30 am, 11:30 am, and 2:30 pm EST). However, it varies depending on the country. There isn’t any critical data coming out.

Conclusion

Forecasting economic data can be a very profitable exercise as this way; you could gain a few pips from price movement before anyone else does. You should know that some traders try to profit from this information due to its volatility, so it’s not uncommon for financial institutions to offer unique services around these events, including news wires, online FX trading platforms, and others. Many people haven’t found their specific niche in the forex market, so maybe news trading will be the perfect solution for them.

What Are the Tools of Monetary Policy? – Monetary Policy Tools

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Monetary policy is operating economic actions for a drastic growth and investment of a country’s financial and economic policies. Regulated, administered, and monitored by the country’s central bank, a monetary policy is devised and implemented to control the domestic money supply and manage the interest rates and macro-economic objectives directly related to sustainability and overall economic matters. The understanding financial course of action involves employing physical and economic plans of activities and strategies enforced by the central bank, currency board, or any other monitoring authority of a country that is responsible for supervising and normalizing the money quantity in terms of economy and determine channel through which new money is distributed and supplied.

It involves meticulous management and administration of money supply and regulation of interest rates and schemes to control inflation, evaluate growth, and analyze consumption and liquidity. As a result, every country’s monetary policy and outcomes diverge according to the preferences and economic goals set on an annual basis. The economic state then evaluates these policies, investors, analysts, and financial analysts as decisions acquired through altered monetary policies strongly influence the markets’ overall economic pillars and other aspects.

What are the tools of monetary policy?

The monetary policy tools are reserve requirements, interest on reserves, the discount rate, and open market operations. These tools represent actions that a central bank can undertake to control the overall money supply and achieve sustainable economic growth.

The formulation of monetary policy is directly influenced by the exposure of multiple inputs from various sources. Therefore, the inculcation of different dynamics such as GDP, inflation rate, sector-specific growth rates, geopolitical parameters, and international markets such as the tariffs and oil embargo is necessary to analyze monetary policy and its formulation. Including these parameters would also allow the representation from small-scale and large-scale industries and businesses, business organizations, and government and non-governmental organizations.

Monetary policy

The monitoring establishments and authorities are looking for balanced policies and strategies to attain particular objectives on an annual or prolonged period. These authorities must implement situations that would automatically participate in a significant rise of GDP, reduce unemployment percentage, maintain foreign exchange Forex, and regulate inflation rates. For effective employment, scrutinizing strategies and policies can be combined with fiscal policies by the government regarding borrowing and exchange to keep the economy flowing. In the United States, the Federal Reserve Bank is the chief central bank responsible for maintaining and regulating monetary policies. The Federal Reserve Bank aims to reduce employment percentage while keeping track of inflation at the same time. Therefore, it is responsible for maintaining an economic balance between growth and inflation rate. It is also accountable for predicting the long-term interest rates and manage them to prevent them from increasing. Furthermore, it provides banks with liquid cash, evaluates and regulates it to avoid failure in banks and fiasco in financial sectors.

The Fed uses four parameters to analyze, evaluate, and understand monetary policy objectives.

Fed monetary policy tools

When the fed adjusts its interest rate, the four main monetary policy tools are:

  • The discount rate: This is the total interest rate provided by the reserve banks from the commercial banks for the short-term acquisition of loans.
  • Reserve requirements: This factor determines the level of reserves a bank is legally allowed to hold. The banks hold these deposit segments in the shape of cash in their vaults or deposits at the reserve bank. If the reserves are increased, it will significantly reduce the availability of funds in the bank system often lent to consumers and businesses.
  • Open market operations: This is the concept of buying and selling government-oriented bonds with commercial banks. The buying and selling of US government assets and securities are considered reliable in addressing monetary policies. This instrument is directed by FOMC and is regulated and implemented by the federal reserve bank of New York. The Federal Reserve lends to the commercial banks at the discounted rate, which assists and complements the open market operations, helps achieve the target federal funds rate, and acts as a principal source of liquidity. The discount rate is directly linked to the interest rates. Higher rates can impede the process of lending and spending by the customers and even businesses.
  • Interest on reserves: This is a considerably new and updated tool used by the Feds after the financial crisis of 2007 and 2009. Interest on reserves is applied on additional capitals accumulated at the reserve banks. Fed often requires commercial banks to hold a small percentage of their deposits on reserve, and in addition to these allotted reserves, commercial banks are often required to have further funds on reserve. Therefore, implementing interest on the reserve is said to use interest on reserves as a primary tool for monetary policy and shape bank lending.

What is the fed’s most important monetary policy tool?

The most important Fed’s monetary policy tool is the Open market operation.  Buying and selling government-oriented bonds with commercial banks can help Fed to achieve desired target federal funds rate. 

When inflation is the Fed aims to slow the economy, what is a tight money policy?

Tight money policy represents the course of action undertaken by a central bank to slow down overheated economic growth and reduce inflation.  Higher interest rates increase the cost of borrowing, reduce spending and reduce inflation.

Types of monetary policies

Monetary policies can be categorized as expansionary and contractionary. The former refers to the strategies to increase economic expansion and growth by enriching economic activity. To achieve this objective, the central bank or the establishment tends to lower the interest rate through different strategies to encourage the concept of spending and purchase. The latter involves the inculcation of a higher inflation rate and the cost of living and conducting business. As a result, the interest rates are increased, and the growth is significantly slower to bring down inflation. On the other hand, contractionary study measures involve a slow and steady chronic growth and increased rate of unemployment as well as keep the economy regulated.

Monetary policy tools examples:

  • Increase or decrease interest rate charged to commercial banks
  • Fed can increase the reserve requirement, and then the Federal Reserve will take money out of the money supply and increase the cost of credit.
  • Buying and selling government-oriented bonds with commercial banks
  • Fed can pay interest on reserves that allows Fed to place a floor on the federal funds rate.

 

 

The effectiveness of monetary policy related to the body is entirely independent of external and internal factors solely responsible for drafting, announcing, and implementing the vital pillars of economic function. These establishments should work independently and without external pressures that include government or political influences. Most central banks and the establishment responsible for implementing monetary policies are well known to receive political and governmental pressure, significantly influencing their decisions.

The credibility and value of Monterrey policies depend on the public credibility. If the policies implemented by the establishments are considered dependable, then the inflation rate is expected to drop and come down quickly. This can only happen if that central authority is independent of decision-making and liberated from political authority. To protect the authority from the potential political pressure, credible policies need to be drafted and implemented by establishments that will help them acquire public confidence.

What are the tools used to implement fiscal policy?

The main tools to implement fiscal policy are taxation (collecting tax on income spending etc. ), spending, and government expenditure.

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