By Darrell Martin
On Thursday, April 26, six members of the European Central Bank (ECB) Executive Board and the 16 governors of the euro area central banks will vote on where to set the interest rate. Since short-term interest rates are among the primary factors in currency valuation, traders watch interest rate changes closely.
This Interest Rate Decision is set to be released at 7:45 AM ET. Two other ECB rates reports are being released at the same time. They are the Deposit Facility Rate and the Marginal Lending Facility Rate. The marginal lending facility is for overnight liquidity. The deposit facility is for overnight deposits. For further information, see www.ecb.europa.eu
The ECB interest rates have remained unchanged for the past several months with the Interest Rate Decision being 0.000 percent, the Deposit Facility Rate staying at -0.40 percent and the Marginal Lending Facility Rate reflecting a continuous 0.25 percent. None is forecast to change with this month’s reports.
However, any time there is news, it can cause movement in the market offering a trading opportunity. This is no exception. When news is expected but direction is unknown, an Iron Condor becomes an ideal strategy to utilize.
Enter as early as 6:00 AM with an expiration time of 8:00 AM looking for a minimum profit of $25. With this strategy, the trader is buying below and selling above the market with the expectation of the market either staying in a range between those points or making a move and pulling back. The concept of a spread is designating a range of a market to trade, which gives a spread option. It has a floor or bottom of the range and a ceiling or top of the range.
Spreads can be bought or sold. The advantage of the floor/ceiling concept is capped, defined risk up front. There is no losing past the floor if trading short or past the ceiling if long. This also applies to profiting. Profits stop at the floor and the ceiling.
Setting up the strategy requires just the right spreads. Buy a spread below the market but with the ceiling where the market is trading at the time. Concurrently, sell a spread above the market but with the floor where the market is trading at the time. The ceiling of the bought spread should meet the floor of the sold spread. The key for this trade is the profit potential of $25 or more combined between the spreads, therefore approximately $13 per spread.
Stop limit orders should be placed in case the market takes off and does not pull back. For a 1:1 risk/reward ratio, place stops 50 pips above and below from where the trade was entered. Break-even points are 25 pips above and below the entry point. Some amount of profit is realized should the market settle anywhere between those two points. Free day trading education is available at Apex Investing.
