Trading the Fed’s economic data reports
By Paul Reid
31 August 2023
In this article, we will cover Exness opinions alongside reporting from Barron’s, a commercial partner of Exness.
Trading economic data releases can be tricky, especially ones from the Federal Reserve. All the major institutions follow US-related releases, causing massive trading volume, and the resultant high volatility can produce sizable profits and catastrophic losses.
In most cases, there is the previous data, the forecast data, and the actual data. To maximize the differences between opening and closing, a trader must set orders before the release using the forecast figure. If the actual data release is below expectations, then the asset value is said to fall. If the data matches forecasts, the asset will move sideways. If the data exceeds expectations, the asset will rise. That’s the traditional approach to trading Fed releases, data reports, and company announcements. But it’s a flawed approach that can kill a trading account that’s not well funded — especially when there’s high leverage and a lack of Stop Loss.
There are two problems with following the traditional approach. Firstly, forecasts are speculation and don’t always reflect the economy accurately. USD won’t always react with an instant uptick when the data is positive.
The other, bigger, problem with trading economic data is early volatility. Very often, we see massive spikes and crashes on release day. These contrasting swings tend to stop out trading accounts in just a few minutes or hours. Setting tight Stop Loss can protect traders' equity, but it almost always guarantees a small loss. So how can you trade a data release?
It’s a scalping heist. Get in, get out, don’t go for big money. Set your profit targets at modest, achievable levels. As for the direction of your order, there’s no way to forecast the volatility, and the actual data tends to affect the price over a longer period.
Some traders wait until the volatility subsides, and then follow the direction that supports the actual data. Other, more risk-averse traders set limit orders prior to the release that are activated by spikes and crashes. High reward, but high risk. But there is one other method for trading Fed releases worth investigating and it’s called the Strangle Strategy. Here’s a deep dive from Barron’s laying out the advantages.
It’s Time to Hedge. This Bet Wins Whether Stocks Rise or Fall.
BY STEVEN M. SEARS | UPDATED AUG 30, 2023 02:00 AM EDT
Those who cast long, powerful shadows over the markets often speak without saying much at all.
They often acknowledge the moment in a way that demonstrates their mastery of events and never reveal much of anything that might benefit anyone who is engaged in the great game of skill and luck known as investing.
Jackson Hole, Wyo., is thus the perfect setting for the Federal Reserve’s summertime symposium. The surrounding mountains and fields are powerfully silent and imbued with whatever you want to see in them.
Fed Chairman Jerome Powell’s recent speech there had something for people who think the central bank might lower interest rates rather than lift them once more. There also was something for those who think rates will stay higher for longer to battle stubborn inflation.
In reality, Powell did little to settle Wall Street’s interest-rate debate or to indicate if he thought the U.S. economy might slip into a recession that could impact the world economy more than China’s economic sclerosis.
But Powell did offer one piece of concrete guidance that oddly seems to have gone unnoticed. “As is often the case,” he said as he concluded his speech, “we are navigating by the stars under cloudy skies. In such circumstances, risk-management considerations are critical.”
The disconnect between his poetic insight and the market mob that hangs on his every word reinforces the present moment’s singularity.
Many investors are pursuing something quite different than risk management. They are addicted to the illusion of quickly and effortlessly making money. The popularity of zero-dated options, which has made extremely short-term gambling a permanent and prominent market fact, reinforces the addictiveness of speculative trades that win big or lose a little. These quick-to-expire options are like financial fentanyl.
But for those who believe that investing is a long-term, multidimensional game of intellectual football played against people all over the world, this is an intriguing moment.
Summer is ending, and two historically volatile months are starting. September is often the most volatile month in the trading calendar as investors worry that October again will birth a monumental decline, as it did in 1929 and 1987.
Rather than committing to a bullish or bearish direction, a Powell-like strategy that could prove profitable whether stocks rally or sink seems better.
The so-called strangle strategy—buying a bearish put and bullish call with similar expirations and strike prices above and below the market—wins if stocks rise or fall.
Consider the Healthcare Select Sector SPDR exchange-traded fund (ticker: XLV). The sector is slightly lower for the year, but it could attract bullish investors looking for undervalued segments of the market, and bearish investors searching for safety amid the money-making machinery of the healthcare industry.
With XLV at 134.85, the October $137 call and October $133 put could be bought for about $2.80. If XLV is at $145 at expiration, the call is worth $8. At $125 at expiration, the put is $8.
The strategy’s risk is that the ETF neither rises or falls, and the money wagered on the Powell-esque trade is lost. But such is the moment that suggests that all we can really state with conviction is that morning is coming and so is the night.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
Trade stocks with confidence thanks to our Exness Stop Out Protection feature, which reduces the risk of stop outs caused by extreme volatility.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.
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