Trading the Fed News

The Federal Reserve is the central bank in the United States and their action and comments, as well as their forecasts are important catalysts that drive market price action.  It is very difficult to predict what the Fed will do, as it pertains to changing monetary policy, but once the central bank announces their intentions, traders may then use the new information to speculate on the future direction of a market.

Fed news takes many forms.  The Fed has monetary policy meetings, where the Fed governors meet 8-times a year to determine monetary policy.  In these meetings the Fed also discuss their thoughts on economic growth and present forecasts for future growth.  The Fed also relates their views on future interest rates and presents a dot plot with an average and standard deviation of forecasts from the members of the monetary policy committee.  In addition to meetings, Fed governors as well as the Fed chair will give speeches where they will relate their views on monetary policy and economic growth.

Trading the monetary policy meetings may be a volatile scenario. When new information is available to market participants markets generally quickly adjust to new levels.  The movement is swift and if you do not take a position prior you are likely to miss the first part of the change to a new level.  Despite this issue, the risk/reward of taking a position when new information is better done if you can limit your risk. One way you may mitigate your downside is to use options.  An option is the right but not the obligation to purchase (or short) a security up until a certain period of time.  The most you may lose when purchasing an option is the premium that you pay for the option.  So if the price of the security moves against you, the maximum loss will be the premium.

Another way to limit your risk and take on a position is to wait until after the event takes place and then determine if the market has priced-in the appropriate amount into the security in question.  For example, if the Fed raises rates and the dollar climbs in value, but you hear from the Fed that this is just the beginning of climbing rate cycle, then you might believe that the dollar has further to climb.

Growth projections released by the Fed may also give you a guide to where they plan to move rates.  These numbers are released immediately after a Fed meeting and may assist you in the process of determining if a security has moved enough to incorporate the new information.

Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).