Trading the Ripple Effect of Federal Reserve Actions

Trading the Ripple Effect of
Federal Reserve Actions
By: www.ProfitableTradingTips.com

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.
By: http://profitabletradingtips.com/profitable-trading-tips/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.

This is the ripple effect. Because of
the tendency of the market to over
react traders can often profit
simply by using technical analysis
of market sentiment. This is the
rebound effect.

Often times no one really knows
exactly what the effects will be of
macro-economic actions such as
the Fed QE program.

As such trading the ripple effect of
Federal Reserve actions as they
play out in the markets may be
more profitable than attempting to
guess the long term results.

Trading the Ripple Effect of Federal Reserve Actions

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Trading the Ripple Effect of Federal Reserve Actions