The FOMC (Federal Open Market Committee) happens to be an important day on the economic calendar of every trader out there. This particular meeting is conducted 8 times every year, and it is imperative for all the traders to get prepared for it. In the subsequent paragraphs, we will provide you an idea of how to trade FOMC.
The essential gauges of the future of the economy of the United States, the FOMC meeting is able to produce a significant amount of market movement before as well as after it happens.
Therefore, the question that arises now is that how is it possible for you to take advantage of this meeting and use it as an integral part of your trading policy. Your initial step will be to be fully aware of what exactly is at stake in the meeting, and also what types of opportunities can be generated from the conference.
All this information has been assembled by us in the subsequent paragraphs to help you in planning for the future.
What Is Going To Take Place In The FOMC Meeting?
As many as 7 governors of the board are going to participate in every single FOMC meeting along with 5 Federal Reserve Bank presidents and they are going to discuss and also take a decision on the economic policy for the United States. There are mainly 2 purposes for this meeting: one will be to review the present financial information, and the other will be to make a decision on what type of intervention will be required.
The decision made by the committee will take into consideration huge amounts of information including fixed investment, household expenditure, employment growth, as well as inflation. Although the meeting will be held privately, the main decisions will be declared immediately after the completion of the meeting at a press conference.
3 weeks following the completion of the meeting, the minutes will be published in full. The intention of the meeting will be to stabilize the economy of the United States by either increasing or diminishing the rates of interest.
The members of the committee can make use of an abundance of economic information for evaluating whether they would like to drive or slow down inflation in relation to the supply of money and the target rate of inflation of 2%.
Why The Meeting Is Important For The Traders?
It is a fact that the FOMC happens to be a significant indicator of the economic health of the US. The decision of the committee can be used by the traders for providing a wider context for their trading techniques. The decision of the FOMC can impact these particular trading instruments directly.The FOMC, together with the NonFarm Payrolls Report, helps to indicate the present condition of the United States economy. Traders might make use of the decision made by the committee for providing a comprehensive context for their marketing policies. The decision made by the FOMC directly impacts some trading instruments which are as follows:
Dollar: In case the FOMC takes a decision of enhancing the rate of interest, there might be an increase in demand and dollar’s value is likely to increase as well. There is a possibility for demand to increase in case the FOMC decides to enhance the rates of interest, and the dollar’s value might increase as well.
Gold: In case dollar becomes strong because of higher rates of interest, it might result in a decrease in the value of gold. It is possible for the traders to flock to the gold in case the result of the meeting shows a negative outlook for the economy of the US, since it will be visualized in the form of a stable asset which is able to hold its value during the turbulent period.
Indices: It is possible for the share prices to go down in the event of any increase in interest rates, which implies that the US indices are subject to movements because of speculation.
Bonds: There might be an overall fall of the bonds due to enhanced rates of interest. The US economy happens to be the biggest economy on the planet, and therefore it is possible to feel the repercussions from the decision of the meeting globally.
Traders worldwide will focus on the decision which will be an indicator of the economic trends throughout the world, and also an understanding of how their inflation policy can be adjusted by other central banks across the world.
How Is It Possible For The Traders To Fine-Tune Their Strategy?
Potential opportunities for trading can be opened up by this volatility surrounding the decision of the FOMC. In particular, their strategy might be adapted by the day traders for optimizing on the shifts which take place before as well as after the conference.
It is common to have speculation several weeks prior to the announcement which implies that the markets might be prepared for any outcome whatsoever. It is important for those who like to stick to the long term trading patterns to keep in mind that the decision of the FOMC might take a significant amount of time for influencing the economy fully.
It might be possible for the traders to optimize on the movements irrespective of the result by figuring out a trading technique which accounts for each of the meetings.
FOMC Forex Strategy
There are two strategies that I use :
1) 5 minutes strategy when FOMC news are unexpected and when I see strong price move.
2) Hourly close strategy based on overall trend and FOMC news.
Scenario 1: Strong move FOMC Forex Strategy
If unexpected FOMC decision makes strong volatility, than I trade after 5 minutes (5 minutes after news). As you can see on image, I will buy after 5 bullish candle close and put stop loss to be at low of that 5 minutes candle.
Scenario 2: Unclear move FOMC Forex Strategy
In this case, if there are no changes in interest rate, I do not trade using 5 minute charts and do not hurry in trading. I watch hourly close and than I decide to to make trade based on on overall trend and volatility. I follow major trend and want to see increase in volatility.
Examples from last FOMC decisions :
This chart shows bullish trend and no changes in trend after FOMC release. I follow main trend and make buy order after FOMC decision.
In May 2019. Federal Reserve officials agreed to “keep their benchmark interest rate unchanged at a target range of 2.25% to 2.5% and signaled comfort that their wait-and-see posture had steadied the economy after fears of a slowdown had sent markets reeling at the end of last year”.
USD started to be stronger but there are no strong push below or above because interest rate was unchanged. I waited hourly close to enter into trade. I made SELL trade and put stop loss on price high just before FOMC meeting.
Conclusion
The FOMC (Federal Open Market Committee) occupies an important place in the financial calendar of every businessman out there. This meeting which takes places as many as 8 times every year typically results in substantial market movements both before as well as following the event. Now the question that might arise is how it will be possible to use this meeting as an integral part of your marketing policy. Below, we have mentioned all the essential steps that will be needed to trade FOMC meeting effectively.
Traders throughout the world will be focusing on the decision made by the FOMC as an indicator of the economic trends across the globe, while the inflation strategy adjustments made by the other central financial institutions will likewise be reflected as well.
The minutes will be published in full 3 weeks after the completion of the meeting. The FOMC will attempt to make the economy stable by either lowering or elevating the interest rates.
