How I Trade Fed Announcements (FOMC) – 4 Step Process

By:

James Knight

James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.

Updated: Sep 26, 2022

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There is a lot of unease and anxiety around FOMC (Federal Open Market Committee) Statement days. What will the Fed say?  How will the market react? Those are good questions. BUT, those are questions I never ask myself when day trading through an FOMC Statement and press conference.

There is a simple, and profitable, 4 step day trading process to utilize on these wonderful news days….and it doesn’t require any guesswork, like the questions above.

Step 1 – How I Trade FOMC Announcements: Setup your Charts

I trade the ES (S&P500) futures contracts and use a 5-minute (primarily) for trading FOMC announcements.

I also use a 21 exponential moving average (EMA) for trend and support analysis.

Step 2 – How I Trade Fed Announcements: Skip the Initial Burst

When you are trading news, it’s typical to want to be part of the initial response to the release. Give that gravy train up, because high-frequency trading and algorithms have the humans beat. It is a game we cannot win anymore.

Example
–Fed did not hike rates, prices soared instantaneously.
–Initial burst was rapid and bullish.

Step 3 – How I Trade FOMC Announcements: Fade the Burst

Once the news is out and the initial burst takes place, you’ll notice the price start to stabilize as supply and demand begin to balance. Don’t jump into a trade yet! There’s no need to call a top (or bottom, depending on the burst direction), wait for it to actually occur.

After a few more minutes, you’ll notice the 5-minute candle peak, and a small wick will occur, which is the price moving off its high (or moving off the low if the price initially dropped). Eventually, a 5-minute candle will move against the initial burst. It may be the next candle, or one that follows. Once you see a move against the main burst (5 minute candle), it’s time to pull the trigger. Use a stop loss that is the lesser of 3 points, or just above the closing price of the initial burst (below the close if the initial burst was to the downside).

Refrain from placing limit orders at whole numbers – always enter on the 0.75 break if going short. For example, if the price is 2,005 on the ES contract, set your entry for 2,004.75. If you are going long, place the order at the 0.25 break (2,005.25). This will skew the probabilities in your favor, as big orders fight for round numbers.

This trade is good for a few candles, but I caution you not to get greedy. If you can pull 4 or 5 points of profit, that is a great trade for step 3.

Example
–Burst move stabilized near 2012.50.
–Next 5 minute bar showed price weakness.
–Shorted 5 contracts at 2010.75, just below weak candle close.

Trade approaches the 21-period EMA near 2005. I closed out my trade at 2,006.25 (always take profit a quarter point before a round number).
4.5 points profit x $50 a point x 5 contracts = $1,125 USD profit (minus commissions)

Step 4 – How I Trade Fed Announcements: Jump on Board the Trend

Now that the initial spike burst has started to fade, ready yourself for your next entry on a (possible) bounce off the 21-period EMA.

Don’t blindly jump into a trade. Wait until the price action stabilizes and bounces off the 21-period moving average, showing the EMA is acting as support. Once you get a confirmation candle showing that the price is moving back in the direction of the initial burst in step 1, put out your entry order with a 4 point stop loss.

Once the price moves at least a few points in your favor, move your stop loss to 0.25 points above break-even and let the trade run. Keep trailing your stop loss every 15 minutes, or 3 bars, and set it 1 point under the 21-period EMA (1 point above EMA if you are in a short trade). The only exit is if the trailed stop loss gets hit. No manual exit! The only exception to this rule is that you have to close your trade by the 4 PM close.

You can often catch a 5 to 15 point run by following this method.

Example
–Price action stabilizes right at the 21-period EMA.
–Bullish candle shows up, showing buying interest.
–Entry set to 2010.25 (just above current 5-minute candle high).

Entry triggered at 2010.25 for 5 contracts long.

Stop loss hasn’t been triggered, but it was approaching 4  PM so I closed my trade at 2017.75 for a 7.5 point run.
7.5 points x $50 a point x 5 contracts = $1,875 USD profit (minus commissions).

Conclusion

There you have it…how I trade the FOMC Announcements, and 3,000 ($) reasons why I love FOMC announcements and the volatility they bring to the marketplace.

This trading strategy has been reliable for me. Yet, test it out on a practice account so you can acclimatize yourself to the approach and see how it works for you.

If you’re not a day trader, or trading in the volatility makes you nervous, then save your money and watch the release from the sidelines. A missed trading opportunity is better than lost money.