You can trade QE by following the trend created by the policy. For currency traders the main result of a QE programme is the impact it has on the related currency. Under normal circumstances QE will act to weaken the currency.
As a trader you can take advantage of this by recognising the coming trend and then riding this move for profits as it plays out.
The overall move often takes weeks and even months to fully play out. Even after the currency has hit its lowest point traders will be looking to sell it every time it rises in value.
To trade quantitative easing effectively you need to have a fundamental understanding of what the markets long term expectations are.
For example, do they expect the QE programme to be increased in the future? If so, this could lead to further selling.
If they expect that the programme will start to slow down and come to a halt then this could actually reduce the selling activity.
As soon as the markets start believing that the central bank will reverse QE then this is where the main trend will actually also reverse and start building momentum in the opposite direction.
What Does The Market Believe?
As you can see, it is not about what is happening but more about what the market believes will happen next that dictates price moves.
Your trades should be based on where in that cycle the central bank is and where the market believes it will start heading next.
Once you understand this concept you will be in a much better positon to actually start to predict moves and place profitable trades.
Two Trading Approaches
There are two main ways to trade a QE programme.
The first way is to enter very early in the cycle and ride the main move over a period of weeks and months.
Timing is key here and entry should be made as close to the initial announcement of QE as possible.
The move may take weeks or months to play out but it will most likely result in a large profit of hundreds or even thousands of pips.
The second way to trade QE is to take a shorter term approach with the big picture in mind.
During the course of the programme the market sentiment will change many times. This will be for a variety of different reasons.
A powerful tactic is to wait until the price of a currency is moving against the overall fundamental trend. Then as it pulls back look to enter at appropriate price points.
Most traders will look for strong levels of support or resistance that give them an edge.
How To Trade Quantitative Easing (QE)
Of course, any sign that the QE programme may be entering a new phase of the cycle is also a very powerful opportunity to enter the market.
These events are rare but if you remain tuned into the financial news you will be prepared to take advantage of them.
We hope this article has helped you to have a better understanding of how to trade QE.
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