Trading in CFDs and generally leveraged products involves substantial risk of loss and you may lose all of your invested capital.
The US Federal Reserve System's influential Federal Open Market Committee (FOMC) is set to hold its first meeting of the year, bringing with it major opportunity and risk. Our trading expert, Stanislav Bernuhov, tells you how to make the most of your chances below. What's more, we're also holding a contest in which you could win USD 1,000 in cash and bonus!
Typically, traders make forecasts about what impact the FOMC meeting will have on interest rates long before the announcement is actually made. From employment data to inflation statistics, traders assess a variety of news sources and make their own conclusions about whether the rate is likely to be raised, lowered, or left unchanged.
Forecasts like these create what I call an “expectation rally”. I’ve demonstrated an example of this in the chart below. In this case, the price goes higher due to expectations and rumors, not due to real data.
Follow the liquidation sell-offs (or buybacks)
It is possible to come out ahead if you do chose to trade during or just after the FOMC announcement. Just bear in mind that you will need focus, fast reaction time, and very careful planning to come out ahead - and even then it can be quite risky. Expectation rallies are usually liquidated quickly, and you should therefore be near your monitor when it happens.
Let’s look at what happened after the FOMC decision announcement on September 20, 2017:
This announcement was notable due to the fact that the interest rate was not changed, contrary to expectations. This meant that traders, who had previously been purchasing EURUSD, were forced to liquidate their positions.
How could one trade in this situation?
The idea is to wait for the price to break after the announcement, then enter the market during a minor rally (but while the overall trend is still downward). You then exit after the price stabilizes.
Remember, that jumping into a rally too early after the news is usually not a good option: volatility is very high and spreads may be widened, so your risk would be increased too.
What if you want to avoid the high volatility - and thus the high risk - associated with the buildup and immediate aftermath of the FOMC’s meeting? Your best bet will be to wait for the markets to calm down following the FOMC announcement before trading again.
How long should you wait? It’s typically best to take one to two days to let emotion work itself out of the market and then to analyze the situation.
The first thing you should do is to visit official website of the Federal Reserve and to read the text of the speech from the press conference. You may not have enough experience to interpret this information correctly, so you should also refer to third-party resources such as Bloomberg to see what top analysts are thinking about the FOMC’s decision. In essence, you have to get a sense of the market sentiment, which can often be more of an art than a science.
Let’s take the Fed governor’s speech from April 2017, as an example. In the text we find largely negative language: “...the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run”. The US Dollar reacted with a decline against the Euro, but later rebounded to a support area, giving an opportunity for a trader to buy EURUSD with a smaller risk.
US FOMC Minutes: Divided Over Number Of Rate Hikes In 2018
The Dec 2017 FOMC minutes showed that most of FOMC officials backed continued gradual rate hike increases and that future rate increases will be guided by inflation outlook and fiscal stimulus.
Fed plans to raise rates in 2018 but lacks consensus on frequency
The Federal Reserve has entered 2018 without a clear plan for raising its benchmark interest rate and with the added uncertainty of an imminent change in its leadership.
|Place||Submitted Price||Submission Date||Prize|
|Firstfirstname.lastname@example.org||1.2412||1/29/2018 14:54:00||USD 500 cash + USD 500 bonus|
|Second||tcl***88@126.COM||1.24072||1/25/2018 20:38:00||USD 150 cash + USD 150 bonus|
|Thirdemail@example.com||1.2405||1/23/2018 15:58:00||USD 50 cash + USD 50 bonus|