Central Banks Drive The Forex Markets
Central banks control the worlds money supply and foreign exchange rates through policy and action. Learning to forecast forex binary options correctly relies on an understanding of central banks and how they interact with each other.
Central Banks Create Market Fundamentals
Central banks make the fundamentals for the market and I mean the entire market. This means commodities and equities as well as currency and forex. These banks are the very foundation of the global monetary system with the power to influence the value of their respective currencies relative to the global exchange system.
They do this through policy, statement and outlook that can send ripples throughout the investment world. Central banks have power in two spheres of influence; one focuses outward and one focused inward. Actions these banks can take include increasing/decreasing the amount of currency available to the market and the amount of interest that financial institutions are charged.
The most important banks to watch are those of the worlds top economies, and in particular the Federal Open Market Committee, or FOMC. The other top banks crucial for traders to keep abreast of are the European Central Bank (ECB), the Bank Of Japan (BOJ) and the Peoples Bank of China (PBC).
Policies can have negative or positive affect on the value of money, which in turn effect the value of investments within the respective country and the value of the currency versus other currencies. The bank with the most influence of all is the FOMC. This is because global commodities are priced in US dollars; FOMC policy can affect the value of gold, oil, corn, wheat and other commodities simply by affecting the value of the dollar. Other major banks have influence over world currency but these are the ones with the widest ranging affects.
What Does This Mean For Binary Options Traders?
One way to gain an edge over the market is to keep up with central bank activity. Their past policies the way they affect global economics and market movement are in fact the cause of the very trends that traders seek to identify. Applying current policies to your analysis is one way of identifying long term technical trends and is the very first confirmation I look for. If policy is in line with trend I am in line with trend so to speak.
Once you identify the trends you can then begin to trade on the day to day economic events that, ironically, often affect central bank activity. Savvy traders can use expectations, and the day to day news, to help predict future market movements.The market is watching the central banks, of that you can have no doubt, it also watches economic data and uses that to build expectations.
The banks themselves watch the data and provide reason for expectations. Expectations affect market movement on a day to day basis as news events unfold, economic data is released and the banks themselves reveal new information. The thing to remember is that the day to day news, expectations and market movements associated with them are near term. These will be smaller movements and likely not to break through significant supports or resistance, namely those on the daily or weekly charts. This is why trading day to day news is for day to day traders.
The long term movements, the ones that will gain dozens if not hundreds of pips, happen much less frequently and can be timed with the central bank meetings themselves. The banks meet regularly but all keep their own schedule. The FOMC for example meets every 6 weeks and takes a break over the summer. This means that there are usually only ten meetings a year. The ECB meets twice a month, but only one meeting a month is a policy meeting. The BOJ meets only once each month but the date is not what I would call regular.
Most weeks there is no meeting, some weeks have one meeting and every once in a while there maybe as many as 3 or 4 major central bank meetings in a single week. A trick I have learned is to take a calendar and mark all expected meetings and use them to help target major turning points; weeks with more than one meeting are usually more volatile and lead to more profits.