The fed has given all indications that it might raise interest rates later in 2015. 70% of Wall Street analysts interviewed by Wall Street journal believed that the tightening could came in September, 20% believe that the hike could came in November while 5% believed that the fed might delay the action to 2016.
Why we choose this outdate example?
Because Traders should everytime carefully follow the fed’s actions because of the importance of the action!
You can be sure: when the date the fed announces the hike, billions of dollars will be lost (and made).
In this article, We will explore the implications of this and how day traders can position their trades to gain regardless the market reaction.
→ How to predict a Fed Rate Hike
How to position yourself before a fed rate hike announcement
As stated above, billions of dollars will be made and lost too when the fed announces the rate hike. Unfortunately, nobody really knows when this will happen (but we previously give you a resources to predict it).
In an interview Janet Yellen, the Fed chair, stated that they had resolved to prepare traders and investors in advance.
This is good for traders!
The implications of not doing this could be the same as what happened in January 2015 when the Swiss National Bank (SNB) removed the peg on their currency.
This resulted to massive losses for both individual and institutional traders, and a number of hedge funds shut down. Brokerage Company, FXCM was forced to be bailed out.
The announcement by Fed would have a similar implications to the market. So, as a trader, there are a number of things you can do to anticipate the move.
When such a policy decision is anticipated, the most important thing for you to do is to be informed.
When you are informed, chances are lower that you will be caught off-guard. The best thing about this is that you don’t need a $200,000 per year Bloomberg subscription to get the information!
It is readily available in all financial news sites and TV stations (you can check our list).
You should be aware of the fed meetings, and also take your time to read the fed minutes which are released a few days after the meeting happens. After doing this, you should make your own independent analysis to make a good forecast.
In their recent minutes, it was clear that the fed might announce the rate cut because of the uncertainties in Global Economy.
As a trader, its important to read between the lines and make an independent analysis. In addition, you should have a look at the American data. The fed stated that they would tighten only when the data was positive.
If the data released continues to be positive, you can be sure that the action is around the corner. On the other hand, if the data disappoints, you can be sure that the tightening could take time.
At such a trading environment, its important for you to use a stop loss in every trade that you make. A stop loss stops a trade automatically when it reaches a predetermined point.
As stated above, the implications of rate hikes in the United States will have very significant implications and billions will be lost.
A well calculated stop loss will help you reduce the risks of losing everything.
You can find the Fed Rate Hike/Cut history in their own website.
Other External Useful Resources
The Impact of Interest Rate Changes by the Federal Reserve – Investopedia