Trading news events in the markets can be a double-edged sword, there is a lot of movement that can either work well in your favor or completely obliterate traders. Equities move a lot based on these overall economic news events like the Federal Open Market Committee events that we’re going to break down here. Mainly indexes and large-cap stocks, our favorite assets to trade during these events are the S&P500 Futures & Nasdaq Futures.
The reason is that news that comes out is very difficult to real-time analyze and prepare for how the market would react from the news. The market prices in the information instantaneously and as traders, it’s not important to predict anything or figure out how the market is affected by what Jerome Powell says in a millisecond. Rather find trades based on the movement from the news.
One of the largest moving news events is the Federal Open Market Committee events and Federal Reserve rate decision days. This is when Jerome Powell, the current Federal Reserve Market Head comes on stage to talk about monetary policy and the decisions made by the other Fed heads.
This is a consistent news event that has market movement, sometimes more than others.
Talking about monetary policy is very hard to predict in real-time and anticipate a market move based on every word that Jerome Powell says, so instead we’ve found a strategy that has consistency with years and years of Fed data.
First, we have to know a little more about these Fed events and what they entail.
- What are Fed days?
- When are Fed days (website)?
- Fed day trading strategy
What are Fed Days?
Fed days are Federal Open Market Committee events that usually happen once a month, they’re not each month, however. This is when the Federal Reserve talks about the monetary policy, any changes and specifically rates & changes around the rates.
The main news event is the Fed’s Funds Rate, the target interest rate range set by the FOMC. This target rate is used as a gauge at which commercial banks lend & borrow with one another overnight.
The Fed event starts at 2:00 PM EST time, that is when the rate change or no change is announced and by how much, which causes market movements. Generally lower rates comply with cheaper borrowing costs and more influx of capital into the markets and economy (bullish). With higher rates doing the opposite. However, it’s not that simple, considering the Fed can also opt in to keep rates unchanged. Also, not all cuts are bullish, or hikes bearish, there are a lot of macroeconomic factors to consider which isn’t our job as day traders.
The event also includes a dot plot and the changes to said dot plot. The Dot Plot is the expectation of the Feds fund rate for future meetings, where the Fed presidents expect rates to be. These changes are important as well for future monetary policy.
Below is an image from Bankrate of what the Dot Plot looks like.
At 2:30PM EST the press conference is held where Jerome Powell, the current head of the Federal Reserve, delivers remarks, which is then followed by a question and answer portion. Throughout all of this, the market moves and there are usually large and volatile swings that have a lot of opportunity, as well can be very tough to trade!
Hence the strategy that will be shared!
When are Fed Days?
It’s important to understand when the Fed days are, there is a website that not only outlines the days the Fed holds the event but also what the general expectations are for rates. These change with additional news on a daily, weekly, and monthly basis.
This is what the website looks like and there are a variety of different things you can check out.
For example, the current expectations for the next meeting (July 31st, 2024) are a 93.3% chance the rate remains the same between 525 & 550 basis points.
The Fed Event Rate Trading Strategy
The strategy for trading these events is based on Equity Futures, this can also be applied to indexes and ETFs like QQQ and SPY. However, the movement is quick and the liquidity on the futures is unmatched.
The strategy basis:
The First move out of the announcement is usually the main move (primary). This means at 2:00 PM when the rate change or unchanged is announced. This will trigger some kind of move in the markets, it can be small.
On the S&P 500 Futures, it can be to the tune of 5-10 points or greater. On the Nasdaq Futures, it can be 15-30 points, which isn’t that insane for that volatile market. Or naturally greater.
There is a 30-minute period between the announcement and the press conference. Where there will be 2 different pullbacks from the initial move before the primary move continues.
Meaning we get a move up or down at 2:00 PM which will dictate the general direction of the Fed days movement, then pullback, followed by a continuation and final pullback before the larger continuation.
The lower-risk pullback is usually the second pullback that happens before the larger move takes place.
Take a look below at the strategy playing out during the January 2024 meeting.
We get an initial drop from the announcement, this is the direction I’m looking for the continuation.
Then we stall, get the first pullback, continuation, then the second pullback and that’s the start of the larger move.
You would want to use other criteria as well like distributions and levels to trade these areas.
Below is March 2024 Fed day as an example.
Where the first move is bullish we get a pop at 2:00 PM from the announcement. Then we get 2 pullbacks which are clearer than the first example to get long, and that’s the continuation of the larger trend on the S&P500.
Using this strategy can give you an edge in understanding how to trade these Fed days which are volatile and can be really opportunistic or can really hurt traders.
It’s important to understand what is happening throughout but we are not macro traders to dissect every little piece of what the Fed Chair says.
Practice this, review it, and look forward to the next Fed day!
