Making Trades Based on a Fed Rate Decision Is No Better Than Gambling
Predicting where a Federal Reserve interest decision might land is akin to betting on a coin flip.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Will it be 25, or will it be 50?
How will the market react to only 25? Better yet, how will it react to 50?
If you don’t know the answer to these questions, then making trades into the Fed rate decision that are directionally biased is no better than gambling.
In trading, you should always ask yourself, “What’s my edge?”
Predicting whether we’ll see a 25 basis point or 50 basis point cut on Wednesday lands somewhere in the range of predicting a coin flip. I have been in the 25 camp but would not be surprised to see 50. Strong arguments can be made for either.
I doubt many have an edge in making a prediction on the size of the cut.
Let’s assume for a second that you have a system or data that strongly supports reasoning for a decision, and it is the right decision. Predicting how the market reacts to the Fed is one of the most challenging aspects of trading the FOMC on rate decision days.
Will we get a sell the news or a fade the first move?
Again, it’s a guess. Anyone who claims to know differently is probably trying to sell you something.
This isn’t the day to play hero. It is a time to watch, gather as much information as the market will give you, carry that into the next morning and see where we head. By lunchtime on Thursday, we will know if the first move has been faded and can make trading decisions based on the additional information in the form of price action.
Remember, you don’t have to trade every day. Over-trading is one of the worst actions a trader can do, and it’s easy to fall into the trap of believing you need to trade every day to come out ahead. The exact opposite is true.
While you are unlikely to catch a top or a bottom waiting for the initial post-FOMC sentiment to play out, you are more likely to avoid getting whipsawed or stopped quickly on a position. That’s the trade off for waiting on information and that’s the one trade I am willing to make today.
At the time of publication, Byrne had no positions in any securities mentioned.
