WARNING: This text is a word-for-word transcription of Mac’s daily forex trading video. That means the writing will reflect the way he speaks, if anything seems out of place, please refer to the forex video on the page.
All right, everyone. Well, we had a nice, big surprise last week with the Fed raising their discount rate. One of the things you have to understand is that there are several different interest rates that the central bankers control. One of those is, let’s say the public interest rate. In other words, the interest rate that will effect the loans and credit card debt. And then there’s the interest rate that effects banks. If you don’t understand how central banking works, in essence the central bank will loan money to other banks literally for one night. And the system is kind of crazy when you think about it, but let’s say we divide up a day into two halves. And this is let’s just say midnight. Well, let’s say a bank is required to have $500. OK? And that’s their reserve requirement. And let’s say that they actually have $300. Oops.
Well, what happens is at midnight the federal reserve is going to look at the bank and say, OK. How much money do you have? Well, we only have 300. The fed is going to say, hey, you were supposed to have 500 and whatever. They’ll come in and audit you or something bad is going to happen to you. So what happens is, instead of going over midnight with only $300, the bank will borrow $200 in the overnight market. And literally, they’re holding it overnight. So the Federal Reserve, it says, how much money do you have?
The bank says, hey, we’ve got $500. The Fed says, OK, no problem. And so they go over the next day, they pay the $200 back, plus interest. And so, strictly speaking, they may have let’s say $294, because they had to pay $6 in interest. That’s essentially the rate that changed was the bank to bank interest, basically. Does it effect the public? Not directly. You could say indirectly because the bank’s cost is going to go up. I’m not buying any… I mean, the banks are going to charge whatever the heck they can get away with.
What’s most important is what happened here, meaning what happened with price here with the British pound. You can see the British pound went down, meaning the US dollar got stronger. What this means is that the market is looking to the US dollar being more valuable in the future than the British pound, even though the Fed came out and tried to say, hey, look. We’re going to try and be upfront with you guys, meaning the marketplace. We’re not entering into a tightening bias. What that means is they were trying to tell people, look.
We’re not going to be raising the interest rates on the US dollar, which brings us almost full circle. One of the things you have to remember about currency is that currencies are driven by interest rates. If the British pound pays more interest than the US dollar, it’s going to go up. If it pays less than the US dollar, it’s going to go down. And so with the pound moving down, we have at least an initial reaction that the US dollar will be paying more interest rate as compared to the British pound somewhere in the future. Now, having said all of that, all of our techniques still hold. All of the support and resistance.
In fact, you remember I was talking about going short up here, watching out for a little dipper coming down into this area, taking the break on the bottom. So either way you slice it, there were some very good trades as the market was coming down. Whether you were an aggressive trader and you sold up here, or you were a more conservative trader and you waited for the market to come back up before you sold. Either way some great trades that wound up being almost a trend type of trade, meaning there was enough momentum to move down so that you could have had more of a position on.
And so if for some reason you didn’t catch the trades that were in here, I would suggest going back to last week, reviewing the videos that I talked about. And even the week before, as the market was coming into this pennant pattern, and I was discussing the positions that were available to us. It also highlights something that’s very, very important. When we were talking about the pound in the 16th of February. Remember, we were looking for the market to go up, but at the same time we were preparing ourselves for the market to go down.
It’s that plan of capitalizing on either direction of the market that will enable you to get in when you should get in to capitalize on these big moves. So if you didn’t get the trades that were over here or the trade that was over here, then go back last week, review some of those setups, or come into the one on one support session of this week and we’ll talk about some of the possibilities that came up in this area.
Now, coming into tomorrow’s trade, you can see on the four hour chart that we do have some compression right here. This is a very sloppy flag pattern, but a flag pattern none the less. And so we’ve got to be on the lookout for a break one way or the other. Of course, we’ve got this short term down trend that we need to consider. So going over here to our one hour bars, this is the sloppy flag pattern that I was talking about on the four hour that actually has more of a pennant pattern look to it. But either way you slice it, it’s compression. OK?
So here’s what we’re looking at on the long side taking trades above 5519. That’s going to be above our resistance level right here. Short trades… Oops, lost my mouse there. Short trades are going to be coming below 5455. So around 54… Let’s see, this is… Yeah. 5451. So coming into 5448, even at 5450, if you’re an aggressive trader is a possibility because we have a bit of a vacuum area coming in here. There’s a little bit of consolidation we’ve got to work through, but I think just looking at the chart patterns here.
If we can break below that 5450 level, we’re going to be challenging the 5360 area for the retest. If you’re wanting to be more of a conservative trader, of course the way you play that is you wait for the break below 5450 and then wait for the market to come up and retest. Then the entry is on a three bar reversal, if you want to be more aggressive. Or waiting for the market to make its little job there and going short below the low.
Again, if any of that’s not clear, I talk about this on December three in the Inside Code kit. I also talk about it in the fast start, or quick start session
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