Forex: Winning Strategies in Forex Trading

By: Mr. Ken Windle

There are many strategies employed in forex trading. The first strategy I would like to discuss is a longer term one, in the time frame of a few weeks to a few months. This strategy exploit the fact that a country currency value will appreciate with a hike in the interest rate and vice versa. Based on the macro economic conditions of a country, the central bank shall decide which of the two, inflationary pressure or market downturn (credit crunch, poor employment data) is of a greater concern to the economy of the country. If the concern on high prices outweighs bad economic situations, then the central bank will hike the interest rate. If the central bankers are more worried about the credit crunch in the markets than inflation, then the central bank shall go into rate cutting exercise. Normally, central bank will have the same bias in a direction for at least a few weeks or months. The central banks of most countries would not be changing its bias abruptly once a decision is made and announced to the world. Therefore, a central bank will continue to raise it interest rate in a row. The opposite is true for a rate cutting exercise.

So the strategy is to look for a country that are in rate hiking direction and another one in a rate cutting direction. Then long (buy) the currency of the country having the rate hiking tendency and short (sell) the currency of the country having the rate cutting tendency. Beware that this strategy is for longer term, therefore, it is prudent to use extremely low leverage or no leverage at all. The advantage of this strategy is that a trader does not need to monitor the market every single minute other than keeping abreast about the relevant countries monetary / fiscal policy may be once a day.

Observe the rise in rate of Euro against USD in the chart below while USA FED was in the rate cutting mode and then European Union Central Bank was in rate hiking mode in the chart below. European Union Central Bank started the rate hiking exercise from 6-Dec-2005, raising the interest rate from 2.00 to 4.25 on 9-Jul-2009. Also, observed the drop in Euro Dollar against USD when Euro Union Central Bank announced the possibility of rate cutting while US FED has almost done with its rate cutting exercise, in the same chart. European Union Central Bank eventually cut its interest rate from 4.25 to 3.75 on 8-OCt-08 and cut again to 3.25 on 6-Nov-08.

What if now all countries are in rate cutting mode? How can this strategy work? The exchange rate is determined by the relative value of each currency. Therefore, a potential twist to this strategy is to determine which country is having higher interest rate now, and therefore having the higher potential of bigger cuts than those having low interest rate. The strategy is then to short (sell) a currency with higher interest rate, where the country is likely to cut interest rate (again) and long the currency having low interest rate. One good example (for discussion purpose only and not a recommendation for trade) of country having high interest rate is New Zealand. It started rate cutting on 23-Oct-08, from 7.5% to 6.5%. If credit crunch is getting worse in New Zealand, the potential of big rate cut is obviously higher than Japan that is having an official interest rate at 0.3%.

If you are interested to explore other winning strategies, try this one or explore this site.

About the author:

Mr.Ken Windle is a professional stock and forex trader. His has been highly successful in stock, options and forex trading in a few major global stock markets and forex market. For details, visit his website.