I’ve touched on this a couple of times before.
When trading ahead of what we in the biz refer to as a “risk event”, you’ve seriously got to question “why” you’d look to take on any additional risk in “getting it wrong”. The fact of the matter is – you’ve got absolutely no clue how it’s going to pan out, and you’ve got no good reason to “trade it” if not looking at it as a complete and total “roll of the dice”. You want to gamble – fine. Take a small percentage of your account, have fun with it, take your chances and hope for the best.
That’s “NOT” how I roll.
This Wednesday’s Fed meeting, and expected announcement of reduced stimulus, is undoubtedly the most highly anticipated and potentially dangerous “risk event” we will have seen in markets in at least the last couple years.
You cannot afford to be on the wrong side of it.
Reading/researching over the weekend , I’ve come to the conclusion that the bond market has clearly priced in the news, but that U.S equities haven’t moved a muscle, and that forex markets are hanging in wait.
I will look for any “and every” opportunity over the next 72 hours to eliminate exposure, take profits, reduce positions, sell into strength etc in order to “ideally” be as close to 100% cash for Wednesday afternoon’s announcement.
This is trading not “fortune-telling”, and I don’t give a rat’s ass which way the market decides to go “post Bernanke” – only that I’m going along with it.
We’ve got fron Sunday night til Wednesday afternoon. Raise cash – don’t be a hero.
Strategic Positioning for Maximum Flexibility
The USD Index Will Tell the Real Story
Here’s what most retail traders completely miss about Fed announcements – it’s not just about what Bernanke says, it’s about how the dollar reacts across the entire spectrum of major pairs. The DXY has been coiling like a spring for weeks now, and Wednesday’s announcement will either launch it through resistance at 84.50 or send it crashing back toward support at 81.00. There’s no middle ground here, and that’s exactly why you don’t want to be caught holding EUR/USD, GBP/USD, or any major dollar pair with size going into this thing. The whipsaw potential is absolutely massive, and I’ve seen too many good traders get their accounts cut in half trying to “predict” Fed outcomes. Smart money isn’t guessing – they’re waiting.
Pay attention to what’s happening in USD/JPY specifically. The pair has been grinding higher for months on taper expectations, but it’s been doing so with decreasing momentum. If the Fed delivers on tapering and USD/JPY can’t break convincingly above 100.00, that’s going to tell you everything you need to know about how overbought this dollar rally has become. Conversely, if we get a dovish surprise and the pair crashes through 95.00, you’re looking at a complete unwind of the carry trade that’s been driving risk assets all year.
Why Cash is King Before Major Central Bank Events
Every wannabe trader thinks being in cash is “missing opportunities.” That’s amateur hour thinking, and it’s exactly why 90% of retail traders lose money. Professional traders understand that capital preservation is the first rule of the game. When you’re sitting in cash 24 hours before a massive risk event, you’re not missing anything – you’re positioning yourself to capitalize on whatever chaos unfolds without having your judgment clouded by existing positions that are bleeding against you.
The beauty of being flat going into Wednesday is simple: you get to see which way the institutional money flows, then you ride the wave instead of fighting the current. Think about it logically – if the Fed tapers and the dollar explodes higher, do you want to be stuck in a long EUR/USD position that you put on because you “thought” the news was already priced in? Hell no. You want to be free to short that same pair at 1.3200 when it’s obvious the market is repricing everything.
Reading the Cross-Asset Tea Leaves
Here’s something that separates profitable forex traders from the herd – we don’t just watch currency pairs in isolation. The fact that bonds have already moved while equities are sitting there like deer in headlights tells me the real fireworks are still coming. When the S&P finally decides to react to whatever the Fed announces, the corresponding moves in risk-sensitive pairs like AUD/USD, NZD/USD, and especially USD/CAD are going to be violent and swift.
Oil’s been hanging around the 108 level for weeks, which keeps USD/CAD pinned near parity, but a major shift in risk sentiment could blow that correlation apart temporarily. Same goes for the Australian dollar – it’s been trading more on China fears than Fed expectations, but Wednesday could completely realign those dynamics overnight. These are the kinds of dislocations that create real trading opportunities, but only if you’re positioned to take advantage of them rather than being trapped in positions that are moving against you.
The Post-Event Playbook
Once the dust settles Wednesday afternoon, the real money gets made in the 48-72 hours that follow. This is when the algorithmic trading systems and institutional flows really kick into gear, creating sustained directional moves that can run for days or even weeks. But here’s the key – you need to be patient enough to let the initial volatility shake out before committing serious capital.
I’ll be watching for failed breakouts in the first hour post-announcement, then looking for the secondary moves that typically happen in the Asian and European sessions that follow. These tend to be the higher-probability setups because they’re driven by real money flows rather than knee-jerk reactions. Whether we’re talking about a sustained dollar rally that pushes EUR/USD toward 1.2800 or a complete reversal that sends it back to 1.3500, the best entries come after the market shows its hand, not before.
Terrific observations and advice Kong!
Stocks have been the enigma of the whole picture. Up, in light of all the storm clouds?!
Of course, those storm clouds are hidden from anyone not willing to do their homework or face the facts.
As I’ve come to understand….stocks are always the last to go, and with the amount of manipulation / bullish / slosh of Fed money currently in play – it’s really no surprise.
Personally…I feel markets topped back in April / May and that this last “gasp” has been primarily a “distribution event” as newbies rush in at the top.
An investor could have easily sat out the entire past 4 months and find themselves in exactly the same spot ( or likely worse considering the “bath” Appl and a host of others have taken).
The divergence in strength across the board has this last rally on fumes….but I won’t be surprised at all to see it take another lil push. That’s the idea right? catch as many people as you can leaning the wrong way.
Tops are a “process” not an event. You know that. I know that.
cheers Dev…..I’ve got a hurricane rollin around a lil north of me, and hope my internet connection holds.
What are your thoughts on the whole Larry Summers debacle? I’m planning to fade the gap on AUD/USD, unless you advise otherwise.
It s big news…….I was just about to post on it.
I’m gonna need at least an hour, but off the top of my head……WOW!
Literally every possible “curve” being thrown ahead of Wednesday….this is setting up to rinse anyone and everyone “gambling” on it.
GAP opens NICE it’s starting already…. LOL buckle up!!
Craaaaaaazy gap too!
I’m on it…as 100 pip gaps in USD pairs can’t be ignored…..in all……..they “should” get filled so………….
Yeah they very well may…. however I have fires in USD/CAD in the 30min…. ( Neg fire but in this pair positive for CAD) tracking the 1hr, 2hr & even the 4hr with the 8hr squeezing in for a set-up as well…. this could turn out to be one final ride… catch the tide before the meeting Wed’s….. :0)
Cheers Schmed…
I’ve got nothin else to do tonight so…..I may just look to scalp this gap / trade a bit for fun.
I’m as close to cash as can be so……aside from the usual day to day here – it’s kinda fun seeing the volatility / move underway.
I’m still staying on the sideline for the most part…but love short term trading too …..
Beats watching shitty T.V as well no?
you bet Dr. Kong….. it’s worth a couple dinners & night outs at the very least…. have a good one!!
Wow, I’m salivating over these Gaps. Although I know you don’t like AUD/CAD and NZD/CAD trades Kong, I prefers these shorts to fill on the gap over USD, but will bite on that a little too. Should be a great start to the week. I’ll also be adding to my GBP short. Good luck to everyone on their gap fills, and let’s see if this “easy money” plays out before Wednesday.
He he he….nice work David – you are clearly “on top of things”.
For me…..gaps are like this…
It’s not “if” they get filled ( especially in the order of 100 pips pr more ) but “when”.
I’ve seen gaps sit open….and price “jet off” some 2 – 300 pips over days / even weeks….before getting filled.
Again…..conviction in your trading, and you’ll do juuuuuust fine.
Just amazing… equities going crazy just on a larry summers news?
WOW… DXY taking a little tumble here….. do we get out move now? weird timed indeed!!
My 30min squeeze fire off nice for CAD…. along with the 1hr….. the 2hrs is next on the chopping block here & right on the cliff…. should continue to move lower in this pair! The 8hr TF is just entering a set-up ….. should the earlier TF fire positive for CAD then the 8hr will set-up nice & should run in a sideways state until fire…. Still looking/tracking the weekly squeeze which has been running for ever….. This fire will create the final move in the pair I believe unless is excessive triggering the monthly which goes WAY back running something like 2 years…. that will be the gravy profit zone…. be we are not there yet to consider this long TF…
Cheers Schemd,
confirmed neg FIRE on the USD/CAD pair… she is going lower… Now I will look for the 4hr TF to fire Neg driving CAD higher here….. we should rest after that…..
Sorry confirmed fire on the 2hr TF…. a little quick on the typing this morning… 🙂