Economic news takes place almost every day at different times.
As Smart Traders, we don’t monitor every piece of news. We typically only pay attention to 2 major events:
- FOMC (Federal Open Market Committee) and
- NFP (Non Farm Payroll)
Both of these news events have different reasons for being volatile.
FOMC deals with interest rates in the US. The lower the interest rates, the better for companies to borrow and grow their businesses, the better for the overall economy.
NFP is announced the first Friday of each month at 8:30AM EST (when the market is closed). It deals with the number of individuals who may be losing their jobs in the US. The US economy is currently fueled 2/3 by the consumer. More individuals losing jobs, less purchasing power, the lower the Earnings on stocks, the lower the stock market goes.
We had an FOMC on Wednesday and for anyone who is not a Smart Trader and not aware of its impact, it can be surprising. Remember that I do hold positions through an FOMC event. If its impact can be adverse to my position why would I hold my trades though such an event? How can I protect myself? Let’s review
The FOMC and our Positions
Professional traders generally do not like surprises in their trading. This can be in the form of an Earnings announcement, an FOMC event or NFP event. They will either be out of the market or they will be hedged. So why would I hold my position?
Once the FOMC event is announced the market makers can “run” the stops. In the event they decide to rally (which triggers the stops on bearish positions) and I am bullish my target can be reached. In the event they decide to sell the market off (and trigger the stops on bullish positions) and I am bearish my target can be reached here.
However what about I am bullish and the market makers decide to sell the market off? Let’s see what steps I can take to protect myself through this event
Protecting through an FOMC
The following are the steps I can take to protect my position. It can apply to both an FOMC and NFP event:
- In the event I am profitable I can adjust my Stop Loss to my entry price. This would only apply to an FOMC event and not a NFP event since the NFP event occurs when the market is closed and the position can gap against me.
- In the event I am not profitable I can simply close out the trade.
- In the event I am profitable I can remove the Stop Loss and buy a counter option that will now hedge my position. Being hedged with a counter option allows me to stay in these trades and ride out any potential adverse move. Hedging is an amazing tool we need to get very good at! You can read more about hedging in my post here.
May everyone have a safe, pleasant, blessed and prosperous trading week!