Reactionary Trading and the Fed

One of the hottest topics in the financial news sections today is the Federal Reserve. Will they raise rates? Will they hold off? What will this do to the economy? These are important questions to ask, and successful traders should be looking to outside events like this to see how they might influence their assets and the trades that they have set forth for them.

It is important to look past the short term, too. When it comes to the Fed’s actions, history has shown us that it has not had a lasting impact upon the overall trend of the marketplace. Over the short term, various assets, and particularly stocks, can be impacted, but these are very short lasting effects. Because we are now so close to the end of 2015, a Fed move in November or December could influence prices for year’s end, but if the move happens later, taking out a put binary option on an asset for this reason alone would be foolish.

On other words, we should be aware that any price movement that occurs because of a Fed decision is purely reactionary. As a binary options trader, this is a good thing to know because you can make money off of reactions. Most of what short term trading is revolves around interpretation of trader psychology. Technical indicators, especially those using candlestick charts, are mainly an attempt to interpret visually how traders respond to price changes. So yes, pay attention to the Fed and be ready to act on what they decide, but don’t let it affect your long term strategy too much.

When looking for assets to trade directly after a Fed move, look for those that are weakest in their sector. If you are trading tech stocks, for example, look to the companies that have weak fundamental indicators. These are the companies that will get hit the hardest by sudden movement because they will not have the natural ability to correct themselves. A company like Apple has a lot of cash in reserve, so a Fed move will have a minimal impact upon them. Another company, especially one that is based upon web services that might not have the greatest market standing, could be wiped out by the short term rush on their stock. Even if something like this were to happen, it does not mean that over the long term it’s a bad thing. Companies come and go constantly, all that a Fed move would do is to find that balance a little more quickly than what would have happened on its own.

Another example would be the dot com bubble of the early 2000s. These stocks had grown so large, but didn’t have the fundamental data backing them up and keeping them safe. When a price move happened, many companies went completely bankrupt. Those that were strong, like Amazon, Google, and Yahoo!, survived and are still strong today. Again, price movements (Fed or not) can have big short term impacts, but the long term impact always goes in the correct direction.

Hopefully this answers some questions that you might have about the Fed’s ability to dictate market prices. They do have some power, but it is very limited. If you are trading binaries to revolve around their actions, the shortest expiries are your best choice. 60 second trades, ranging up to 15 minutes are all sound approaches to this type of reactionary trading. Your timing is important, and the more your practice and master the use of technical charts, the easier this will become. After this timeframe, Fed moves just start to become too risky to try and trade with accuracy.