Understanding FOMC Day and Its Impact on Markets

Swing trading chart illustrating market response on FOMC Day

I honestly despise FOMC Days! Swing trading FOMC days is one of the hardest trading sessions of the year, and on average there are about eight of them. But what I want to discuss in this article is my approach and how I deal with my swing trades during these particular sessions. Now I am only talking about swing trades. My long-term positions, my dividend plays, aren’t positions that I give much thought to relative to FOMC days, but for my swing trading, it is incredibly important.

What is FOMC Day?

FOMC stands for the Federal Open Market Committee, which is the monetary policymaking body of the Federal Reserve System in the United States. The committee holds eight scheduled meetings per year, where they discuss and decide on the nation’s monetary policy, including setting the target for the federal funds rate. This rate influences the cost of borrowing and lending money, which in turn affects the overall economy.

On FOMC day, the committee releases a statement outlining their decision on interest rates and their assessment of the current economic conditions.  This is where the fun starts (sarcasm implied). This statement is closely watched by investors, traders, and financial institutions worldwide, as it provides insights into the future direction of the U.S. economy and the potential impact on various financial markets, including stocks, bonds, and currencies. It comes out at 2:00 PM eastern time, followed by a press conference held by Jerome Powell or whoever the sitting chairman is, to take on further questions and create a real ruckus for the market.

Swing Trading Strategies for FOMC Day

Swing trading FOMC days creates the potential for significant market volatility that often accompanies the release of the committee’s statement. Prior to the announcement the market is usually dead and shows extremely low volume levels. But once the statement comes out, that is where all the chaos is unleashed. Now historically, it has always been the statement that causes the volatility, but over the past year, the volatility and wild price swings have centered around the press conference that Jerome Powell oversees.

Personally, I find pretty much anyone who fills the chairman’s role detestable and listening to them talk makes me want to steal grandpa’s blood pressure medication, to keep me from going into cardiac arrest, just by hearing them talk. But even as much as I may hate these days, as a swing trader I have to be ready to take on this difficult task.

Manage Risk Effectively

Probably 99% of the time I won’t make any new swing trades the day of the FOMC announcement, leading up to the announcement, and I will wait for price to settle in during the presser, which many times it doesn’t. So most of the time I don’t create any new swing trades for myself.

Stop-losses are very susceptible to being stopped out as well as the initial reactions can instantly stop traders out if their stops are too close relative to their price. Often times, if price is too close to my stop-loss (like under 1%) I’ll close out my position.

You want to remember that the first move the market makes will usually be followed up with a counter move of its own. That is often because the Street is trying to profit off of both sides of their straddle plays. There’s also just a ton of knee jerk reactions that everyone tries to out do the other in getting ahead of, so that causes a lot of chaos as well. But remember, that first move can’t be trusted. It doesn’t mean that it isn’t the ultimate direction that the market will take, just that it may have some pretty radical reversals in between.Free Swing Trading Resources

There will be wild swings on FOMC Day

Where most traders will get themselves into trouble is trying to jump on every move that presents itself. Revenge trading is another aspect that you have to be careful of. I was long SDS with a little more than 2% in profits on the trade coming into the May 1, 2024 FOMC Statement. This is an ETF that provides a 2:1 inverse return to the S&P 500. Once the decision came out and the presser started, the market started a 77 point rip to the upside. It was gigantic. Obviously this worked against my position in SDS. So about half way in, I realized if I held much longer, I would probably be white-knuckling the position, and that I was likely to see my position go from green to red. So I cashed out of the trade for an overall +1.1% return. Nothing special, but still a profit. I felt good about it too, as the market continued to rally, which would have hurt my position had I stayed in. I was starting to think “hmmm… should I be getting long?” At that point, I knew that would be an emotional decision so I held off. Not necessarily overtrading, but unnecessary trading nonetheless.

Once JPow was done talking, I kid you not, the market dropped like Wile E. Coyote falling off a cliff. That means SDS, which I had closed out earlier, went from being deep in the red, to green from an 84 point drop on S&P 500 in the final hour. Now, I think to myself, “I should jump back in” – probably not a good idea though, because here I can feel the emotions are pretty high from within, so recognizing that, I hold off and wait for another day to trade.

Here’s the chart of my swing trade

Detailed chart of a swing trade on FOMC Day showing market volatility.

As you can see it was a whip-lash trading session. Yesterday, entry couldn’t have been better. Took some profits along the way, but once the FOMC Day commenced with the Statement, all swing trading bets were off. I got whipped out of the trade, only to watch it go right back up.

Did I do the right thing with my swing trade?

Going into the trading session I expected it would be a wild one, so it’s hard to expect perfection out of such a wild trading session. Was it frustrating though? Absolutely! One of the things that I am glad that I did though, and I started doing this a long time ago, is I turn off the financial news. No CNBC, no Bloomberg, nothing. Those people are clowns anyways. But having them talk in the background, with a bunch of charlatans talking up their book can really get into one’s head and start perceiving things in the charts that aren’t actually there. Going forward, I doubt I’ll even listen to JPow speak either. I think for myself and many others, he doesn’t help matters. But overall, coming away with a profit on SDS, I’m fine with. Missing out on the subsequent move back up is disheartening but there’s nothing I can do about it. Jumping in and out and back in again would have likely resulted in plenty of losses on the day, and I was able to avoid that.

You still have tomorrow for swing trading and without the effects of FOMC Day

I think we tend to forget this in the moment, that with eight sessions out of the year dedicated to interest rate policy, QE and QT by the FOMC, it pays just to take a lesser role on these days and avoid the nonsense altogether. I have been trading for over 30 years now, which means I’ve seen 240 or so of these, and they only get worse, and provide less reason for me to even consider trading. And I think if you’re looking to protect yourself and your capital going forward, avoid FOMC Days, as it pertains to swing trading, is the way to go!

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Hope to see you in there!