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Trading the Ripple Effect of Federal Reserve Actions
There is a useful application of technical analysis in trading stocks, foreign currencies or interest rates and in stock, Forex or interest rate options trading. It is trading the ripple effect of Federal Reserve actions. This last weekend the Federal Reserve Bank of Kansas City hosted its annual meeting a Jackson Hole, Wyoming. Not only do members of the US Federal Reserve attend this meeting but also heads of the International Monetary Fund, central bank heads from across the world and academic leaders in the world of economics. While policy makers compare notes, academics give talks. At issue this year are the effects of the Federal Reserve Quantitative Easing (QE) program and the effects of its gradual cessation. Policy makers credit the Fed QE program with averting the worst effects of the greatest recession in three quarters of a century. Academics are quoted as saying that perhaps the program had some benefit or did not do too much harm. Much of the academic criticism has to do with the Fed not being clear about how fast it will cut back on its $85 Billion a month purchases of US Treasuries. Those trading the ripple effect of Federal Reserve actions do not have the luxury of purely academic thought and need to think like the Fed in terms of concrete actions and expected results.
Ripples and Rebounds and Anticipation
As a practical matter let us say that you are trading the ripple effect of Federal Reserve actions. Two months ago the Fed intimated that it was about time to cut back on QE. The bond market sold and interest rates rose. Nevertheless the Fed has yet to change its course of action. As US interest rates rise the value of the US dollar goes up and the value of currencies in the developing world go down. If you are trading the ripple effect of Federal Reserve actions in the Forex markets you may want to bet on the dollar rising farther when the Fed finally decides to start reducing bond purchases. However, it may well be that by that time the market will have already discounted the news! To the extent that the market may well over react, a contrarian approach to day trading may be useful. Contrarians look for and take advantage of temporary market inefficiency. However, the contrarian approach to day trading often lies on the opposite side of those who studiously engage in trend following in day trading. In a contrarian approach to day trading, traders seek to understand both the psychology of trading and the fundamentals that eventually determine stock prices. This approach is essential in trading the ripple effect of Federal Reserve actions. No matter whether you are trading stocks, Forex, interest rates or options on any of these, the actions of the Fed will have consequences.