Last Wednesday, the 18th March, saw the Federal Open Market Committee provide us with their latest US Economic Policy statement, and their accompanying thoughts on the overall health of the US economy as a whole.
The previous Chairman of the Federal Reserve, Ben Bernanke, once said that the committee spends the vast majority of its time ensuring that the actual wording of the statement to be released does not upset the market. This time, the removal of one single word from the previous statement – “patience” – ensured that the majority of the US denominated markets reacted quickly and decisively.
There were large movements in the US indices, in all USD Forex pairs and in the precious metals markets in particular. This caught a lot of traders unawares, and they were then left chasing a market which had already moved. This is no different than running after a train as it is pulling out of the station – some might be lucky to get on it, while most would be left stranded on the platform wondering what might have been.
The important point to remember is that, although correct risk management plays a huge part when trading the financial markets, it plays an even larger part when trading the financial markets during times when influential economics announcement are being made. The mistakes most frequently made are that people either do not place a stop loss, or they place a stop loss to close to the market price – they do not allow for this increase in volatility.
When traders neglect to accept the fact that volatility increases, that spreads increase, that trading volume increases during these times, it leads to losses.
The Academy of Financial Trading concentrates on ensuring that when calculating your acceptable risk level, it also takes into account the market volatility. This means that when you get it right, you will not be stopped out because of a few minutes of excessive market movement.