This article looks at how forex training should prepare you for the impact of interest rates.
Before you trade on the forex market you have to look at forex training. There is a lot of information that forex training should tell you about and things that it should prepare you for. One of these things is the impact of the interest rates on the forex market. There are two ways that the interest rates affect the forex market and you need to know about this.
Why Forex Training Covers the Interest Rates?
Forex training needs to cover the impact of the interest rates because this is considered to be a high impact news release. The interest rates fundamentally affect the currency value and the overall view of the economy of a country. With this level of impact on the currency there will be a high impact on the movements that you see on the forex market.
If your forex training does not prepare you for the interest rates then you are not going to be able to make the most of these movements. There are two very different ways that traders can use the interest rates and your training should tell you about both of these.
The Impact on Price Action
One of the ways that the interest rates affect the forex market is through their impact on the price action. When there is a change in the rates there is going to be a change in the price action of the affected currency pairs. When a currency increases the interest rate then the value will increase. This generally causes trends in the market where the currency with the high interest rate strengthens against the other currency. The opposite will be true if the currency has a lowered interest rate.
These price action movements on the market are what most traders look for with the trading strategies. The movement allows the trader to make a profit on the strengthening or weakening of the currency. This is possible the more common way that traders will be affected by the interest rates.
The Use of the Carry Trade
The carry trade is something that a lot of traders look at to make a profit from the passive rollover interest that brokers offer. Rollover interest is the amount that you are paid for the holding of a certain currency overnight. The currency that you hold needs to be a high interest rate currency. Of course, this will only work if you have a low interest rate currency as the other side of the currency pair.
The ideal currency pair for the carry trade will have one currency with a very high interest rate and one currency with a very low interest rate. The larger the different between the two interest rates the higher the rollover interest that you receive.
There are some traders who look at this type of trading as a strategy that they can use on its own. However, there are others traders who combine the carry trade with other long-term trading strategies. The training that you go through should tell you able to the carry trade and how to make the most of this.