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Soultrader

Trading Fed News: Methodologies

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I personally do not trade the news but have been watching the market reaction to fed news for quite some time. I have noticed one interesting pattern

 

The pattern is the 1-2-3 wave pattern. At the moment of the news release the market reacts fast and rapidly into one direction.

 

Let's say on the initial news, the markets moves up. This is the first wave. The second wave is the correction to the overreaction. The market then makes a rapid decline as fast as the initial upthrust.

 

So far we have a 1-2 wave move. The third wave is the most interesting price action. From my observation this tends to be the correct direction. The third wave will then go in the same direction as the initail move.

 

So one trading setup I am currently designing is to wait for the second wave to finish. The first wave is the correct move but usually too fast to enter or else you will be chasing. The second wave is unpredicatable as there is no price level to anticipate the reversal.

 

Therefore the trading setup I have in mind is to place an buy order at the the midpoint of the range of the first wave.

 

So for example: if the first wave goes from 12200 to 12250, and the second wave goes from 12250 to 12210, the buy entry would be placed at 12225 after the second wave.

 

I have seen price take off well above the first wave on fed days.

 

Anyone else have any thoughts on trading Fed days? I would love to hear some opinion on this or perhaps other methodologies used to trade fed days.

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You probably know I'm a S/R, trendlines, and patterns trader. I normally don't stick around for the afternoon to trade, so on Fed news I'm there once in a while. But in these 2 examples, I would have traded like this.

 

newbie-trader-fed-news-2006-9-21-600-ticks-trendlines-short.gif

 

newbie-trader-fed-news-2006-8-8-600-ticks-trendlines-short.gif

 

As you can see, the moment leading up to the Fed news, the chart has already said alot: moving up to resistance and drop below the support that became resistance. On the next rally, I'd sell and my stop would have been above the resistance lines. The top chart, the short was 45 minutes after the announcement. The 2nd short was 1 hour later. By that time the volume would have settled to find real direction by then. Of course 20/20 hindsight it's great but trading it is a different picture. I always look for higher high/higher low for longs and lower high/lower low for shorts.

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Torero,

 

Could you make something clear for me.Im having some trouble reading the charts and at which location the news came out. In the first chart, did the markets rally into the news? Did the markets decline on the news?

 

Thanks

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The shaded boxes are where the news came out (between 2:00pm and 2:15pm). I drew this arbitrarily because the time is not important to me. My only concern is how the prices treat the S/R levels. The red arrows are where my short entries would be.

 

So in both charts, the news came out, the first chart didn't go down hard, although it was already bearish before the news (left side of shaded box), it was already below the rectangle support. When it came up to meet it was resistance, right when the fed news came out. Since prices didn't bring it back above the resistance, it was still bearish so I waited for a lower high to make my entry.

 

The 2nd one where the fed news came out, it tanked hard, hitting past below the rising trendline, that was bearish. It recovered and stop at that line again, this time it's used as resistance, that's a confirmation that the market was bearish. Then it preceeded to chop forming a small HnS. Once it broke the neckline, I measured the target.

 

Hope that explains it better.

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Thanks for the explanation torero. It makes things much clearer now. Also the setup you have applied is fairly interesting using simple S&R levels. I'm going to be paying attention to these levels.

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S/R levels on this timeframe is decent, but the most reliable are daily, weekly, and monthly. In this case, it worked in this time frame for fed news. But opens and closes as well as trendlines and patterns on these higher frames are more reliable.

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