How to react to Central Bank Speeches in order to make profit?

Jarratt Davis

Special Consultant to the FPA

Day Trading Central Bank Speeches
This post is designed to show you that trading in line with central banks doesn’t always mean that you have to take big long term positions and hold them for weeks and months at a time.

The video here is a classic example of how to do this. And Nick very kindly recorded another of his trades so that we could illustrate this process to you.

In fact, the banks and their members regularly interact with the media and the markets by various speeches and events that they attend.

These speeches are very often scripted but there are also plenty of occasions when they may say something unexpected or answer a question in ‘the heat of the moment’. That causes the markets to react and start trading the related currency.

Your job as a retail trader is to practice the process of following central banks on a daily basis. Do it in order so you could catch these moves as they occur. Usually they do not last for long, but there are definitely pips you can make.

There are two important things that you need to factor in when trying to trade central bank speeches and comments. Let’s look at them now:

Prevailing sentiment
In the video you will notice that Nick knew he wanted to sell USD. And he also knew that he wanted to do it against the GBP. The reason for this was that he was fully aware of recent goings on with the pound and how it had been moving.

It had already fallen hard and then it recently started having positive data coming out. So it was ripe for a recovery…. It just needed some catalyst.

It’s important to note that he didn’t have to sit around for 3 hours researching what had been happening on the GBP lately. He knew it. This was because he is a day trader that has the news feeds running every day so that he can see all of this information and form a feeling about what the prevailing sentiment is and which currencies are most prone to a move one way or the other.

One of the main reasons I wanted to write this post is to hammer home the point that it takes dedicated practice to become good at trading. If you want to be a day trader, then a news feed is about the most basic tool you need to start doing that successfully.

There are no professional trading firms on the planet that do not have access real time news. This is where the money is.

And by tuning into these feeds on a daily basis, you will also start to naturally form an understanding of which currencies are ripe for trading, so that when something does happen you instantly know which currencies you want to be trading in order to get the maximum advantage.

Understanding the markets next move
Once you have the idea of which currencies are doing what and how the market is feeling about them all generally your next component to making money is by figuring out (quickly) how the market is most likely going to react to a certain piece of news or information.

For example, a central bank might decide to cut its interest rate. And everyone expects this to happen, and going into that rate decision the currency might fall.

To a normal person on the street, who has a basic understanding of how the fundamentals operate, it might be reasonable to assume that the price of the currency should keep falling even after the rate cut is announced.

Of course they feel shock when suddenly the price starts rallying strongly. What does that mean? Is the market not really following the fundamentals?

The answer is that the market approaches trading in the same way as poker players approach a big game. They are always looking to get ahead of the curve. This means that they are always trying to think of what will happen next rather than what is happening now.

This common misunderstanding is why a lot of retail traders just don’t ‘get’ the fundamentals or consider them complicated. Instead, they simply need to view the market through the eyes of a professional.

In our example of a rate cut … The market is no longer reacting to the cut. That has happened and it’s old news. The market is now trying to figure out what the bank will do next …. It’s this forward planning that is the key to profits.

So in the video, when Yellen was dovish, this caused the markets to bet that the Fed might not dramatically hike rates after all (Which was their current view) …. Which led to a sell off of USD.

The other main reason for writing this post was to help you understand this mind-set that the market has. If you can grasp it and start thinking like them – then you can start to predict how they will react to things in the future.

So what is the quickest way to tune into what the market is doing and how it is reacting? Watch the news feeds and watch these things play out, over and over, day after day and learn from it.

So hopefully you can see that there are plenty of opportunities to day trade the fundamentals. And also that trading with central banks doesn’t mean long term positions necessarily.

So keep the two main lessons of this article in mind:

1. Focus on the sentiment
2. Try to understand how the markets will most likely react.

Then you can get practicing and see your results improve as more and more opportunities start to jump out at you from those news feeds!

P.S. - If you want to learn more about how I trade, check out the link below

Jarratt Davis - Free Forex Course