How are you going to trade FOMC? Are you ready for the tricks and traps that banks play every time? Here’s a guide to what you should look for.
The FOMC Press Conference is the most important financial event in the calendar.
When Jerome Powell speaks, the market listens and often his comments will set up directional moves in the dollar for days or even weeks.
But it’s also the time when the banks and institutions are at their sneakiest, tricking retail traders into entering the market in the wrong direction at exactly the wrong moment.
FOMC Time Windows
Before the speech, the market will often settle into a trading range. The biggest mistake traders can make here is to enter the market with a pre-conceived notion as to where it will go.
Usually about 30 minutes before the speech, we have the Fed Funds Interest Rate announcement, which may cause volatility, but it’s merely a distraction before the main FOMC event.
As Powell starts to speak, banks and hedge funds will start a fake move, run trader’s stops and encourage other traders on the sidelines to enter in the wrong direction.
The reason for this will become clear in the diagram below… traders who had bought early get stopped out and their sell orders provide liquidity (or fuel) for the banks to enter long. Of course, the same can happen in the opposite direction too.
After Powell has finished speaking and questions from journalists are done, you may notice the market has completely reversed. If that is the case, there’s a good probability it will continue in that direction and you can enter the market in the new direction.
What I want to see here in terms of price action is a sharp spike or a “V” shape, just as above.
S&P 500 Example 22nd March
Below is a 15 minute chart of the S&P 500. Notice that before FOMC, the market fell into a trading range for the entire day. This may have encouraged less informed traders to take a “punt” on the direction of the FOMC event before it happened.
Now, notice that even if you entered after the Fed Funds Rate, it may have have been too early as the market spiked even higher during the FOMC press conference.
However, if you had waited until after Powell stopped talking, that was the ideal time to enter short. At that point, the market had reversed back into the range, it was unlikely the banks would want to spike the high again and the market had shown it’s hand with intended direction.
So if you’ve ever wondered what on earth people mean when they tell you to “listen to the market” but without any helpful hints, this is exactly it!
One further point to notice on the above chart is the day’s range low (the lower red line) that is eventually taken out. This is a clear breakdown of structure and a further indication of bearishness.
Notice that in addition to the day’s range being stop-hunted, the market also took out the stops above a major swing high.
When a major high or low is taken out during the press conference, this gives a stronger setup.
Here’s another example of the same setup, this time on the 1 hour chart for the FOMC press conference of 1st February.
Note the range that was formed during the day, bounded by two red lines.
Powell starts speaking and the range is spiked. Traders who went long are stopped out and others are encouraged to go short.
During the press conference the market quickly reverses and after Powell stops speaking, longs are confirmed and the directional bias continues late into the next day.