Trade the FOMC

Posted in: Advanced Trading Strategies, Day Trading, Trading News

Trading over big numbers or highly anticipated market events can be a point of contention. On the one hand there’s a great deal of movement and the opportunity to take some nice profits. On the other hand the increased volatility can be very erratic and cause traders to take some big losses. The FOMC is just such an event.

For this reason some traders choose to trade the FOMC and some choose to mitigate the potentially elevated risk by avoiding the event entirely. Whichever path you choose to follow, it’s crucial to carefully consider your approach.

What many traders tend to do over a big release if they do trade it, is they see movement and then try to immediately jump in on it. But there are several reasons why this is a dangerous game to play.

Speed of market

Speed Traffic at Dramatic Sundown Time - light trails on motorwaMost traders simply do not have a setup capable of staying in touch with what’s currently happening when volatility spikes. Compare the average day trader to what the trading elite have in their arsenal. The average day trader is trading at home over a standard ISP and with a non-dedicated computer, possibly thousands of miles away from the exchange. This all adds to latency. You can’t assume that if you’re sitting in an arcade you’re immune to these issues either – it really depends on the level of sophistication of the arcade’s setup.

Compare this to the systems that top firms or trading algorithms employ and you can start to see just how disadvantaged many traders are going to be.

Interpretation of incoming information

But then there’s the issue of interpretation too and the bias that is often given to our own positions. If you trade the FOMC you’ll hear the various parts of it being reported by squawks over a short period. Any of these items in isolation, have the potential to make the markets move and so multiple items released sequentially, can send the market up and then hurtling back down in no time at all. Figuring out what the market’s conclusion of the FOMC as a whole is frequently a less than straightforward matter. Taking a view and then clinging on to a trade that fits this idea can have disastrous consequences even if a trader isn’t wrong on the overall direction.

“The market can stay irrational longer than you can stay solvent.”

– John Maynard Keynes

But whilst trading the FOMC in an unstructured and reactive manner is potentially dangerous, it does often bring a great deal of movement and as a trader, movement is what you have to live for. So how can you better approach this kind of scenario?

Wait for a tell

In exactly the same way as you might be looking for context to help you identify the chance of high probability setups occurring ahead of time, you can use context to figure out what the market might be doing over the FOMC. There are numerous ways to do this, but for simplicity, I tend to combine price action and Fibonacci retracements of a move.

Over the FOMC just gone (3/18/15), we can see that the NQ failed to pull back past the 38.2% retracement of its initial thrust (drawn in from the official statement release time). I use the 38.2% as a cue to assess the chance that the move might be faltering, along with how the market reacts to testing key reference prices.

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A combination of the NQ making higher lows and higher highs together with the lack of a substantial retracement of the initial thrust had me thinking that the move higher was set to continue. Knowing that this FOMC statement was likely to be a market mover that would bring in longer term participants, my expectations of how far it could go were adjusted accordingly. 4394.50 became a key short-term price as on the second pullback, sellers held it as the upper bound of a tight short-term range and then after making another higher high, it held on the third pullback.

Any additional buying opportunities generated by Trend Jumper with the NQ making new highs would get my attention.

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When it finally gave an opportunity on breaking to make new session highs, the trade gave a nice runner of 13.50 points. True, there were other decent trades that occurred before this particular opportunity, but in terms of taking a context driven trade following the FOMC statement, this was the one to take.

Listen to the news but trade the action

I’d give one more reminder when trading over big news items – listen to the news but trade the action. If you hear something that you believe is particularly bullish, then you must gauge the impact before deciding how to trade it. Just because it seems like it should be bullish doesn’t mean that the market hasn’t already priced in a more bullish release than what actually transpired.

But if the price action and context fits with what you’ve heard, then there could be good reason to get involved in a continuation move.

Trade the FOMC

Overall I believe it’s dangerous for most people to trade the FOMC and other big news events. Market movement can be lightening quick and seemingly erratic, whilst at the same time trader emotions run high and can sabotage trading decisions. But if you’re intention is to sit back and let the event start to play out before you get involved, I believe that the opportunities to profit from day trading futures can be substantial.

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Trade well.

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Coach James

James began his trading career nearly a decade ago, learning his craft in fixed income derivatives. These days, he predominantly day trades index futures using auction context as the vital ingredient to his approach. James is a firm believer in the importance of trader psychology and how it can make such a monumental difference to how well a trader performs.
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