[Jerry]

Hello David...Thanks for all you do...Couldnt help but notice...today @ 9am chairman Bernanke made a quick speech which sometimes may give a hint regarding the future plans of the Federal Reserve etc.. I was not involved on any forex trade at the time..( and thankfully not on the wrong side either..).but as of this writing..I noticed that the eur/usd has moved over 150 pips alone...all US pairs have made major moves...the us dollar had strengthened...but my question is...How does this move happen SO INCREDIBLY fast? Started moving exactly @ 9 oclock AM..and how could we have traded this..??
Thanks,
Jerry

[David Waring]

Hi Jerry,

Good question. Here is a good overview of the speak by Chairman Bernanke.

Bloomberg.com: Worldwide

As I discuss in module 8 of my free basics of trading course, the markets always pay special attention anytime anyone from the fed speaks, especially when it is the chairman of the Fed who is currently Ben Bernanke.

As this is the case, the markets can move very quickly anytime a fed official says anything that would cause the markets to believe that some new information was given which was not already factored in by market participants.

There were two main things that are noteworthy from the speech this morning, one minor and one major. The minor thing is that Bernanke basically signalled that the Fed is done with interest rate cuts, something many in the market were already anticipating.

The major thing was the part of the above bloomberg article where quote Bernanke as saying: The Fed is working with the Treasury to ``carefully monitor developments in foreign exchange markets'' and is aware of the effect of the dollar's decline on inflation and price expectations.

This is a huge, huge statement in regards to the forex market for 2 reasons:

1. US Dollar policy is the responsibility of the United States Treasury under Hank Paulson currently. Because of this the Federal reserve normally does not even talk about the dollar, even though they affect the value of the US Dollar through interest rate changes. So the fact that the fed has even mentioned the US Dollar in a speech is a huge sign that they are paying attention to the weakness in the dollar.

2. Feeding into the above, the mere fact that the Fed has mentioned the US Dollar means that they are concerned about the weakness of the dollar and therefore may take action, through monetary policy or currency intervention, to halt the slide of the dollar.

Both of these things were not factored into the price of the dollar and it only took one sentance to show that, and therefore the dollar made a large move in a matter of seconds.

As far as trying to trade a move like this I personally would not. The reason why is that I base my trades on trying to predict future market action based on fundamentals (fundamental analysis) and past price action (technical analysis). Although some would disagree in my opinion both these things kind of go out the window in the minutes after a news realease and the market trades in a wildly and therefore unpredictable manner.

Those that do try to trade events like this do so however in two ways:

1. They try to jump on board for the move as the market rockets in one direction. The problem with this is that the market is very illiquid when there is a shock to the market like this was so normally traders who try to do this get bad fills and instead of realizing that this is how things work they blame their loss on the forex broker they are trading with.

Because they get into the move late often times the main part of the move is done and the market reverses just as they get their fill.

2. Trade the reaction to the move. Often times after news realeases the market will fire off in one direciton, sucking in all the "dumb money" and then drastically reverse in the opposite direction stopping all those traders out. Some traders will try to position for this.

For more on this type of strategy see the below lessons:

Using Multiple Profit Targest to Trade Forex News Releases

Using Fibonacci to Measure Market Spikes on News in the Forex Market

Why Delayed Entry is Best

Why Not To Trade The News

Re-Test - Support Becomes Resistance

Trading Non Farm Payrolls When the Number Comes in Off Estimates

Hope that helps.

Best Regards,
Dave

[Jerry]

Thank you very much Dave... I guess missing out is better than being on the wrong side... I guess I ll let things calm down and re-evaluate...pips2U..Jerry