How to use central banks in Forex Trading

Understanding the role which central banks play in the Forex market can be helpful for both fundamental and technical traders and investors. I find throughout my Forex trading course that depending on people’s confidence about the state of the global economy, the effect which central banks and interest rate policy makers have on the financial market can vary.  For example, imagine a stable economy with a highly predictable interest rate; such an economy will be of less concern to traders and investors across the world compared to an unstable economy such as Greece and Ireland as we’re experiencing in this current economic climate. Based on the education I received in my Forex trading course and my experience I would recommend that the main central banks to keep an eye an out for include the European Central Bank (ECB), The Bank of Japan (BOJ), The Bank of England (BOE) and finally The US Federal Reserve Board.

The decisions by the ECB mainly affect the countries within the Euro zone as well as countries such as the UK which are somewhat directly connected to the Euro zone but not part of it.  I mainly look to the ECB to identify what they prepare for their council meetings, their stance on monetary policy for the Euro area and how they exercise their regulatory powers of. The main thing to be aware of is that the ECB meets twice a month so I always keep my economic calendar up-to-date in order to avoid getting into the market when a speech or an important announcement is due. Additionally, I listen out comments by members of the governing council as their comments can move markets.

The BOE and BOJ have a Monetary Policy Committee and The Policy Board respectively; these committees are responsible for maintaining financial and monetary stability. Just as I keep an eye out for the actions of the ECB, I also attach huge significance to comments by members of the MPC for instance, as these can send markets into frenzy of speculation.

Most importantly, it is worth keeping an eye on the US because it is one of the largest economies in the world and one which most traders look to for direction. As a result I also keep up-to-date with the most current decision by the US Federal Reserve Board which is headed by Ben Bernanke. Actions and decisions by Ben Bernanke will generally affect US related currency pairs but is not limited to them as other global economies and currency pairs may also be affected.

The most important thing to keep in mind is that decisions and comments have the most impact when they are out of line with public consensus and expectations. Consequently, I aim to have no open positions or orders pending when significant news is due as the market may go into frenzy mode.

Dragan Lukic is a Forex trader at Forex Training Worldwide. Our Forex course is the most comprehensive Forex trading course for beginners to Forex. Visit www.forextrainingworldwide.com for more details or call one of our Forex mentors to see how they can help you throughout your Forex training to ensure you make money from trading the currency markets.

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