With experience, skill and a bit of luck, it’s often possible to make a quick, profitable trade in the minutes after an FOMC announcement by “fading” the first reaction spike.
The Fed announces its Target Funds Rate decision at 2:15 EST on the last day of the meeting, normally a Tuesday for one-day meetings and Wednesday for two-day meetings. Immediately after the announcement, the market typically goes into wild oscillations, the amplitude of which depends on recent volatility, whether the announcement is a “surprise” compared to expectations, and most of all, how many people are watching and waiting to jump in.
Caution #1: This trade is not for the inexperienced, the undisciplined or the faint of heart. I’d only recommend it to experienced traders who have the self-control to take a small loss instantly, not giving in to “hope” for even 5 seconds if the trade goes against you, because if this trade goes against you, you may be on the wrong side of the Big Swing, and holding on can do massive damage in a matter of minutes. It’s best to watch a few Fed announcement days and paper-trade for practice first, noting the (many) ways in which you can get caught pointing in the wrong direction.
Caution #2: This pattern works out about 60+% of the time, in my experience. I consider those great odds since the anticipated gain is multiples of the maximum loss (initial stop!). However, the times it doesn’t work, if you drop your plan and start trying to “second-guess” entry points, you’re just trading on emotion, and you WILL lose money. If the trade sets up, I take it. Otherwise, I do not trade Fed days except occasionally right at the close.
The Setup: Wait for the First Swing to Falter
(Note- there’s an example chart at the bottom of this post)
The “fade trade” takes advantage of the fact that individuals often react to the first movement after the news, afraid of being left out of a big run. The “smart” money usually lets this swing go for a few minutes (typically until about 2:20 or 2:25), then takes it violently in the other direction, often doubling or tripling the range of the first swing.
The Trade: Spike, Doodle, Reverse!
Here’s how I enter the Fed Fade Trade:
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I ignore the market altogether until at least 2:10 EST. Sometimes I don’t even look until around 2:19 to 2:20, so that I don’t get caught up in the excitement when the announcement hits.
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A short time-frame chart is required to see the swings clearly. My personal preference is 3-minute bars. 5-minute bars work pretty well, too. 1-minute bars usually cause me to enter or exit too soon.
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Important! I let the post-2:15 swing go whichever direction it likes, however far it likes. It may spike up on “bad” news or down on “good” news. I do not try to predict the direction by the news.
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At about 2:20, I start watching for one or two narrow-range sideways bars near the extreme of the spike. These bars often appear between 2:19 and 2:29.
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Once a narrow bar has formed, I take the break of its range in the opposite direction of the spike as an entry signal, with the extreme of the spike as a hard stop. No exceptions, no wait- and- see, no hoping.
For example, if we get a downward spike from 2:15 to 2:20, then a sideways “noodle,” I’ll get long (opposite the spike) on the break of the “noodle” bar’s top, with a stop at the spike’s low.
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At this point, if the price reverses back through the extreme of the spike and hits the initial stop (and this can be 10 seconds after the trade is placed), the trade is exited, no ifs, ands or buts.
The Exit
Ok, so what if I catch the falling knife and find myself up “6R” in 14 minutes? This is where stop-management strategies come in, and I’d recommend a very aggressive trailing stop. This is a quick trade, the trend is NOT your friend; spank it and get out.
I watch for reversals particularly at 1) the level where the first spike started at 2:15 EST and 2) when the current thrust has reached 2x the range of the first spike. If we make it through those, I’ll trail the stop up using Fibonacci levels or my variation on the PSAR. If the spike I’m riding is simply HUGE and I’m up “8-10R” or more (happens only once every few years), I’ll jump out at the first sign of any reversal, whether I’ve caught the extreme or not.
What It Looks Like: A Long FFT Off A 2:15 Down Spike
I’ve watched this phenomenon for many years, and traded it quite a few times. I have not captured intraday charts on Fed days, however, so here is a hand-drawn example for your viewing pleasure:
The Fed meeting coming up this Tuesday should be a doosey. We may see some extreme post-announcement action. Should be fun.
Let me know what you think- comments always welcomed.
