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In this video we’ll be explaining how you need to study and dissect market expectations leading up to a Central Bank event.
Now, we will also be showing you how the money is made from waiting for the bank to act or speak in a way that deviates from those market expectations. This is how professional traders make money from Central Bank statements.
Okay, so you might be aware that currency markets move heavily based around Central Bank policies and statements. Now, if the interest rate is heading lower, the currency will head lower too and generally vice versa for a rising interest rate as well. You might also be aware that all major Central Banks meet at regular intervals each year to discuss and adjust their monetary policy.
Traders follow those events very closely because of the impact those Central Banks and statements can have on currency prices. The key to making money from these events is not necessarily in what the bank says or does, but instead it’s all about how those things that they do and say deviates away from what the market was expecting them to say or do.
Another thing you need to know is that Central Banks will really just adjust its interest rate up or down out of the blue. If they did that, the price of the currency would move wildly and the volatility would be very damaging. So, they try to avoid all the unnecessary volatility. And the way they do that is they move in very small steps. So, the cornerstone of these small steps is the language and the communication also known as forward guidance. What this all means is that they will very subtly try and tell the market what they are planning to do next.
If they are too direct in their language, they risk huge volatility and market instability. And if they are too vague, they run the risk that the market’s missed the point of their message entirely. So one of the tactics that the Central Banks use is to alter specific wordings inside their written statements.
Now traders can then read through these statements and compare to the last statement that was released to see where the changes came in. Now these very tiny changes in a word here and there is enough to give the markets little clues about what the bank might start to do next in terms of monetary policy.
Rather than just ripping up the previous statement and rewriting it every time, the banks will evolve these statements gradually over several meetings. Changing a few words here and there, just enough so that the market can get the hint without actually confirming anything in black and white.
Their goal is to keep the market guessing, but to keep them guessing the correct general direction. So let’s quickly take a look at a statement with these subtle changes highlighted. Now, this statement is from the Fed or the Federal Reserve Bank in the United States.
As you guys can see, the changes are very subtle, and professional traders and analysts quickly get used to interpreting these Central Bank languages and statements very quickly. Now, when they detect a slight shift in language, they begin to speculate which way the bank might move next in terms of their monetary policy. All of this translates into currency price moves as the traders start to react to these changes.
So, if you want to make more money from Central Bank statements, remember to research the market’s current expectations. That’s always your first step. Then you need to study each statement and compare to the previous one.
Over time, this will help you to understand the Central Bank language and how you can start to make money from it. Now, to help you shortcut this process, you can also follow professional analysts in the market that interpret all of these statements for you and give you the meat of the information in their concise reports.
Thanks for watching this video. This idea for this video came from the questions that you guys asked us in the comments section about fundamental analysis. So please keep all of your questions coming.
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