Interest Rate Forex Indicator
Logikfx's 'interest rates forex indicator' helps traders identify the 'hot-money flow' between two currencies. By calculating the Net Interest Rate Differential (NIRD), forex traders get an instant insight into long and short opportunities.
The rich will always buy the currency that pays the most!
- Marcus, founder of Logikfx
Why Interest Rates Matter
One of the most influential factors in future forex prices is the changes in interest paid (interest rate) on each currency. These changes are due to an ever-changing supply and demand for currencies in the interbank market, driven by many economic variables from the previous month. Thus, causing massive market movements, suggesting interest rates are imperative for Forex traders to consider if they wish to maximise the money they make.
It's common in the industry to think of the interest rates as the price of money, the same way goods and services are priced in money, money is priced in interest - Marcus, CEO
For example, if the U.S. dollar has a 2% interest rate, and the British Pound has a 1% interest rate, forex traders would expect the currency pair GBPUSD to fall. The idea is that the High Net Worth (HNW) traders will sell their British pounds in order to earn a higher return by holding U.S. Dollars instead. Therefore, leading to the conclusion that the value of a currency depends on how much interest it earns, sitting in the bank.
How The Indicator Works
The Interest Rate Forex Indicator uses the Net Interest Rate Differential (NIRD) formula and is automatically updated when new data is released by each central bank.
What is the Net Interest Rate Differential (NIRD)?
Net Interest Rate Differential (NIRD) in the forex markets is the difference between the interest rates of two currencies. For example, if the U.S. dollar has a 2% rate while the Japanese Yen has a 1% rate, the NIRD would be the difference between the dollar rate and the yen's rate. So, the NIRD in this example would be 2% minus 1% equalling a 1% differential.
How The Indicator Predicts Forex Price
If the differential is positive, this is a long bias on the currency pair
If the differential is negative, this is a short bias on the currency pair
Therefore, continuing the above example, the positive differential of 1% would generally signal to forex traders that the currency pair USDJPY will long.
What The Indicator Looks Like
Best ways to use the indicator
The Interest Rate Forex Indicator is best used as a tool within a larger strategy, like the 'Global Macro Approach'. Here are a few tips:
Always calculate macro currency strength first: It's important to understand the influence of all other economic indicators for each individual currency, before comparing interest rates. This will help increase the confidence level of each forex trade, and the macro currency strength meter does that for you.
Check market positioning before entering a trade: Once you have an idea to long or short using the Interest Rate indicator, and currency strength, you need to determine if there's enough fuel in the market. Generally, traders use the Commitments of Traders (COT) Report to do this.
Manage the risk: To maximise the profit made from using the interest rates, always set your targets and stop losses based on the average volatility of the currency pair.
Finally, as with any tool, meter or indicator, it has its limitations. And should be used as part of a wider, more complete system, as the one taught in the logikfx academy.
