According to the recently released Federal Reserve meeting minutes, the fundamental economic data that measures the health of the U.S. economy is strong enough to warrant a rate hike in mid-December.
This is good news for the Forex and options traders that focus on the U.S. dollar. A rate hike will increase the value of the dollar against most other currencies in the world. In fact, in the early hours of the Asian trading day right after the Fed minutes were released, the dollar basket index had already moved upward by about 0.1 percent. This is a huge amount of movement for a highly traded currency, especially against other major currencies.
Indices like the .DXY (the U.S. dollar measure against a few other major currencies) are not always 100 percent accurate at measuring movement, but they can act as a good tool for approximating what will happen overall, especially if you are looking at how the index operates early in the Asian trading day and then applying that knowledge during European or American trading hours. As a general rule, the hours where markets have overlapping trading times are where the highest amount of volume is seen, and thus where movement occurs at the fast pace. If you trade currencies as an options traders, then these are the times of day where you can expect to see the most amount of volatility. If prices are moving in a predictable fashion, like what we saw during this event, then trades are going to be more profitable for you. A higher correct trade rate easily translates into a higher profit rate.
In this particular instance, there are difficult circumstances going on, which makes its applicability to future situations a little tougher than normal. For one, it occurred during the holiday week of Thanksgiving in the U.S. Japan also has a public holiday during this week and their market was closed, which limited a lot of the volume that could have occurred here. While it’s a rare occurrence to have two holidays limiting trading hours like this, it proved to be beneficial to currency traders all over the world. Because it decreased volume for a few days, it led to more predictable movement for a longer period of time. Regardless of the market that you focused on, this helped to increase profitability.
In a normal situation, when markets move based upon anticipated policies and changes, if and when that policy comes to fruition, then price movement isn’t as severe after the fact. In a way, this is the public’s way of preparing their portfolios for the change so that when it does occur, it is not as harmful to them. For those of us that wait to move on an asset—in this case, any currency pair containing the USD—until after the event in question has occurred and not on preliminary market psychological action, then we are missing out on a lot of opportunity. Psychological trading can be a powerful tool for the day trader.
Psychological can also be a double edged sword if you’re not careful. Reducing costs is important, which is why many traders have navigated toward options and the Forex market. There are still costs, but for the most part, both of these trading tools can be very cost effective. But this only occurs if risk management features are put into effect. You need to place stop-loss features into your Forex trading so that you are not seeing large losses when psychology moves against what you think. And with trades, you need to ensure that your timeframes are not so far away that you cannot place new trades to correct a mistake on your part.