Let us see the basic question:
What does FOMC stand for? The FOMC stands for Federal Open Market Committee and represents a Federal Reserve System branch that determines the monetary policy’s direction by directing open market operations.
What is FOMC?
FOMC or Federal Open Market Committee is a board of governors, seven members, and five Federal Reserve Bank presidents. The main task for FOMC is to control monetary policy.
What does the FOMC do?
FOMC or Federal Open Market Committee conducts monetary policy for the U.S. central bank and acts as the Federal Reserve System’s monetary policymaking body.
Why is FOMC meeting important for traders?
The FOMC (Federal Open Market Committee) happens to be an important day on every trader’s economic calendar out there. This particular meeting is conducted 8 times every year, and all the traders must get prepared for it. In the subsequent paragraphs, we will provide you an idea of how to trade FOMC.
The essential gauges of the United States’ economy’s future, the FOMC meeting can produce a significant market movement before and after it happens.
How often does FOMC meet? FOMC holds eight regularly scheduled meetings during the year, around one about every six weeks, and other meetings as needed.
Therefore, the question that arises now is 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 is at stake in the meeting and what opportunities can be generated from the conference.
We have assembled all this information 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 FOMC meeting, and 5 Federal Reserve Bank presidents will discuss and decide on the economic United States’ economic policy mainly 2 purposes for this meeting: one will be to review the present financial information, and the other will be to decide 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 completing the press conference meeting.
3 weeks following the completion of the meeting, the minutes will be published in full. The meeting will intend to stabilize the United States’ economy by increasing or diminishing interest rates.
The committee members can use an abundance of economic information to evaluate whether they would like to drive or slow down inflation about the supply of money and the target rate of inflation of 2%.
Why Is The Meeting Important For The Traders?
It is a fact that the FOMC happens to be a significant indicator of the US’s economic health. The traders can use the decision of the committee to provide 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 committee’s decision to provide a comprehensive context for their marketing policies. The decision made by the FOMC directly impacts some trading instruments, which are as follows:
Dollar: If the FOMC decides to enhance the rate of interest, there might be an increase in demand, and the dollar’s value is likely to increase as well. There is a possibility for demand to increase if the FOMC decides to enhance the interest rates, and the dollar’s value might increase as well.
Gold: If the dollar becomes strong because of higher interest rates, it might decrease gold’s value. The traders can flock to the gold if the meeting result shows a negative outlook for the US’s economy since it will be visualized as a stable asset that can hold its value during a turbulent period.
Indices: The share prices can 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 indicate the economic trends throughout the world, and understand how other central banks can adjust their inflation policy.
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 adopted by the day traders for optimizing the shifts which take place before as well as after the conference.
It is common to have speculation several weeks before 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 to influence the economy fully.
It might be possible for the traders to optimize the movements irrespective of the result by figuring out a trading technique that accounts for each meeting.
FOMC Forex Strategy
FOMC forex strategy is based on news strategy trading where traders can enter into the market 5 minutes after FOMC news or when the hourly candle is closed.
There are two strategies that I use :
1) 5 minutes strategy when FOMC news is unexpected and when I see a strong price move.
2) Hourly close strategy based on the overall trend and FOMC news.
Scenario 1: Strong move FOMC Forex Strategy
If an unexpected FOMC decision makes strong volatility, I trade after 5 minutes (5 minutes after the news). As you can see on the image, I will buy after 5 bullish candles close and stop loss to be at low that 5-minute 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 then I decide to make a trade based on an overall trend and volatility. I follow the major trend and want to see an increase in volatility.
Examples from last FOMC decisions :
This chart shows a bullish trend and no changes in trend after the FOMC release. I follow the main trend and make a buy order after the 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 is no strong push below or above because the interest rate was unchanged. I waited hourly close to enter into trade. I made a SELL trade and put stop loss on price high just before the FOMC meeting.
Conclusion
The FOMC (Federal Open Market Committee) occupies an important place in every businessman’s financial calendar out there. This meeting, which takes place as many as 8 times every year, typically results in substantial market movements before and after the event. 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 meetings effectively.
Throughout the world, traders will be focusing on the decision made by the FOMC as an indicator of the economic trends across the globe. In contrast, 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.