Why you should not be day trading about the FOMC announcement time

The picture that follows explains it quite well, I believe. To spell it out: it's because of a huge increase in volatility that very predictably occurs around the time the said announcement is made, which is around 2 P.M. EST on a Tuesday or a Wednesday a few times each year. The precise dates of these days are posted in advance on the Federal Open Market Committee (FOMC) web site and you are well advised to consult it if you are a day trader, particularly if you day trade e-mini futures, instruments known for their volatility and rather considerable leverage that can be lethal to your account if it works against you.

Volatility spike about the time of the FOMC announcement on December 18th, 2013
Huge volatility spike about the time of the FOMC announcement on December 18th, 2013

For your convenience, the calendar for these events can be reached here. The meetings start on a Tuesday and may continue until the following Wednesday, and it is on the last day of the meeting that the announcement with the power to shake the trading charts takes place. Around 2 P.M. EST, as mentioned already.

The last time this happened this year (2013) was on December 18th, a lovely Wednesday, especially in Southern California, where pretty much all Wednesdays are lovely. Or Tuesdays, for that matter, and I will not mention any other days of the week so that you don't feel too bad about living in less balmy a place than, say, Los Angeles. Just teasing ... The picture above that shows a 1-minute chart in YM, the Dow Jones e-mini futures market, is quite dramatic. One of those large 1-minute bars is over 100 points in length. If you were on the wrong side of the market at that point (and some people were), you might have lost quite a bit of money, sometimes more than the size of your stop-loss as during sharp moves like that there are no guarantees that your stop order will get filled at your desired price. Don't count on that too much.

So what do you do when volatility spikes like that? Well, you stay put. You wait until a definite trend is established, and when this happens the trend is pretty strong, so you may want to take advantage of it.

That's what also happened on December 18th, as you can see from the next picture. The trend that follows the announcement was definitely up and you could have gone long. That was the best, most profitable direction to play in these circumstances.

Clear uptrend after the FOMC announcement on December 18th, 2013
Clear uptrend after the FOMC announcement on December 18th, 2013

Incidentally, the software that produces these gorgeous charts is called Sierra Chart and I have been using it for years now. More than 10 as of this point.

I took some trades on this day too and they were all after the announcement. I even posted them on Twitter, a habit that I have developed over the last few months. The last trading update this day is reproduced (embedded) below. For more such updates, about which you can learn more from this article, you may want to follow me there. On Twitter, that is.

The first of these trades was a quickie (my name for the trades that don't take even a whole minute to reach their target of 5-10 ticks in YM) and even a 10-pointer. It was a very fast trade even as far as quickies go. Only a few seconds in duration. Other trades were good too. Not all of them on a long side. If volatility is good you can try a short side too even in a market with a strong up trend.

Posted on December 22nd, 2013.