Here is a simple strategy for trading the FOMC Announcement. This is a great strategy if you are day trading the markets.
First of all, what is the FOMC?
Eight times per year a branch of the Federal Reserve Board, known as the FOMC (Federal Open Market Committee), meets to set key interest rates. They also make decisions as to whether to increase (or decrease) the money supply, known as Quantitative Easing (QE).
The time of the announcement is crucial here for this strategy and although this can vary from time to time, it is usually at 7:15 pm GMT (2:15 pm EST). The dates and the time of the FOMC meeting announcement is displayed on the Federal Reserve website.
Open a 5 minute chart of the S&P 500. Then plot the 21 and 200 exponential moving averages (EMA) on your chart. Although I like to execute this trading strategy on the S&P, it works on the Dow as well. You can do this very simply on the charts of ETX Capital Trading Platform.
At the scheduled time of the FOMC meeting announcement (see above), there is usually an initial big move in one direction – this is known as wave A. This first major move is the “true” direction – i.e. where the market really wants to go. (Note: Do NOT execute any trade at this point yet).
For example, here is a chart of the S&P 500 on September 13th 2012, where the FOMC meeting announcement was made 17:30 GMT (12:30 EST). Incidentally this is the same date when the Feds announced QE3.
NOTE: even though the chart says 3-minute, you can do this very simply on a 5-minute timeframe chart.
Notice the first big move, or the “true” move was in the upward direction as shown by Wave A.
After the initial big move (wave A), there is then a retracement of this move (wave B) which takes the market to at least the 21 Exponential moving average (EMA). This is known as the “fake” move.
Enter the market when the S&P reaches the 21 EMA with a 3 point stop and an open target. (Alternatively, you can scale in to this trade with half size at the 21 EMA, and then add the remaining half to your position at the 200 EMA.)
What follows is Wave C which is in the same direction as the initial move (Wave A). Close half your position once you have made 3 points on the trade, bring your stop to breakeven, and then use a trailing stop on the 21 EMA for the remaining half.
In the example of this FOMC trade (above) on September 13th 2012, we managed to make 18 points or $900 per contract. If you were spreadbetting, this would have equated to 180 “spreadbet points” or £1,800 for a £10 per point trade.
Here is another recent example from the last FOMC meeting on October 24th 2012:
Notice that in the above chart, the first big move (wave A) was in the downward direction – this was the “true” move. This was follows by the retracement rally (wave B). We shorted the market by scaling in at the 21 and 200 EMAs. We then took half profits once we made 3 points on the trade, brought our stop to breakeven and then trailed our stop at the 21 EMA until we were stopped for a 5 point gain or $250 per contract (or 50 spreadbet points and £500 on a £10 per point trade).
Did this strategy help you? Leave me your comments below.
Alessio Rastani is a stock and forex trader at www.leadingtrader.com