Trading on Fed Days: Protection and Opportunities

Every trader worth his salt adjusts strategy on Fed days. While day traders like our very own Kunal, Maribeth and Z Man love the intraday volatility, the night before a Fed day can put the part-time and swing trader in a cold sweat. However, it doesn’t have to be that way.

The swing trader must do two things on Fed days.

1. Protect current positions

2. Stalk opportunities

Protecting current positions is simple. You already have a stop set for all your positions. On Fed days I monitor my positions closely with mental stops and am quick to cut out of a position that goes against me on heavy volume. Volume is the key here. If the down move is on light move there is often an over reaction to the Fed and I’ll give the position slightly more room. Only slightly. I will not allow for any big losses on this day.

Now the fun part. Fed days can also be known as “over reaction” day, and many great stocks get hit for a day or two before rebounding. The key is identifying the stock that is just hit with a momentary blip versus stocks that are tumbling into down trends or hard pullbacks.

Stocks front and center on Fed days are stocks with recent strong catalysts like earnings, fantastic money flow and volume patterns and stocks from recent leading sectors. If I see what looks like an over reaction in a stock like this, and the pullback gives me great reward to risk, I’ll take a shot with an entry. I generally go with a smaller position size and as usually, vigilantly manage risk.

See, trading on Fed days doesn’t have to be stressful. If you have any good “Fed day” opportunities, comment below.

Paul Singh Administrator

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