Beat the Forex Dealer by Agustin Silvani

Author:Agustin Silvani
Language: eng
Format: mobi
Publisher: Wiley
Published: 2010-05-10T20:00:00+00:00

18

Trading the FED

Whenever the Federal Market Open Committee (FOMC) meets to set interest rates in the US, trading proves tricky, to say the least. These days the FED goes out of its way to telegraph the moves well in advance, so the market has switched from the nail-biting hike or no hike scenario to looking and analyzing every single word in the accompanying statement. This evaluation and re-evaluation of what the Fed actually “means” translates into a free-for-all immediately following the release, and dealers are hard at work chopping up players on both sides of the market while the FX heavy-hitters sit and deliberate whether the statement was “hawkish” or “dovish”.

What should one do in a situation like this, when the price jumps 50 pips one minute and then dives 50 the next? Simple: wait for the dust to settle and let the price action guide your moves. Since traders like to limit their exposure before any FED release, the market will tend to trade a reasonably tight range the day(s) before any announcement, and these range extremes can be used effectively to trade with the dealers, and against the general public.

This is how Joe Trader would trade this FOMC release. When the FOMC announces its quarter-point rate hike (the market bought on the rumour and is now selling the fact) Joe goes long at the next tradable price (1, 2). Stops are placed at a “safe” distance and the EURUSD spends the next five minutes whipping back and forth, wiping clean any stops in an 80-point range.

After ten minutes, the pair moves higher again and Joe is convinced that this time the move is for real, so he sets his stops below the previous low, away from the noise (3, 4). Dealers see the spec market go long EURUSD so they are happy to fade the move higher and target the downside stops (5). Intra-day stops are successfully tripped, and dealers take back their shorts for a nice profit and call it a day (6). Frustrated, Joe Trader throws in the towel, and the market is free to move back within the range again.

The minutes after an FOMC release.

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