The US FOMC’s (Federal Open Markets Committee) monthly statement is due out later today during the US Sessions. Given the circumstances, it is touted to be one of the key policy making events this year with repercussions reaching far and wide. Here are some trading tips to bear in mind for the trader, those who are gearing up to trade based off this news releases.
Protecting your equity
Equity protection cannot be stressed enough and trading during such volatile events can make or break your fund. It brings to question the topic of placing your stops correctly. Due to the nature of the event, prices can spike in either ways, thus what would seem like a logical stop level can easily be taken out only to have your trade move back to the original direction. The possibility of the trade breaching a key level where you place your stops and zoom through it also cannot be ignored.
FOMC can affect any currency/security
For central bank speeches such as the ECB or the BoE, the policy statements are confined to their respective currencies. Thus, the contagion effect is quite limited. Some traders tend to trade offbeat pairs such as the Swiss Franc or the Canadian Dollar and in most cases, the monetary policy statement usually doesn’t play a big role for such pairs. However, with the US Dollar being the world’s reserve currency, the chances of other currencies to react cannot be ruled out. So pay attention to the Bond Markets, Gold prices, US Dollar Index amongst other currency pairs.
Don’t try to guess
It might seem tempting to go ahead of the policy committee and draw one’s own conclusions. However, this can have distraous effects, even if you seem to have a firm background in macro economic events and such data. What might seem logical to you could very well be the pain point for one of the FOMC members which could go against you.
Its not just about Interest Rates
Previously a central bank meeting would usually revolve around inflation targets and interest rates. The world has changed quite a lot. In today’s age of easy money printing, there is a lot more information to be paid attention too. Variables such as economic data, forward guidance, budget deficits can pay a big role as interest rates take a back seat.
Ease the pedal on Technical Analysis
One of the most important factors to remember is that trading a high impact release such as the FOMC is basically trading off fundamental data. So no matter how tempting that moving average cross-over might look like, always tell yourself that at least for the next couple of candles, its the fundamentals that have the upper hand.
Wait for markets to digest the news
If the US session see’s a sell-off in the US Dollar, never forget that the Asian session is yet to open. Thus if a trade moves against you, you are better off to cut your losses than to wait and hope for better sense to prevail. Markets often react impulsively to such important news and takes its own time to digest the news and get back in the right direction. Make sure that you try to stay out of this choppy market at least until the news is well analyzed.
Trading a key event such as the FOMC should be approached very cautiously. While the news event can prove to bring that volatility and 50+ pip moves, it can be booth a boon and a bane. So trade wisely. If in doubt, close out your trades and rather understand how prices react or how the decisions are made instead of trying to bring your own conclusions to the table. Remember, the Fed is termed the ‘800-Pound‘ Gorilla. At times it pays to stay on the sidelines rather than to just dive in and take a gamble.