The Fed's interest-rate decision on Wednesday provides a good opportunity to think about your approach to active trading.
As a novice trader, I often thought of trading as an exercise in predicting the future. I'd formulate a thesis, place my trades, and then wait for the payoff.
Sometimes it worked, sometimes it didn't. It was more about gambling than speculating.
Over time, my view of how to trade an event like a central bank interest-rate decision or the reaction to an earnings report evolved. Rather than try to guess what the market would do the second that the news hit, I would focus more on the reaction to the news and how it changed over time
The news event itself is just a trigger that leads to a series of reverberations. It is navigating the volatility after the news that is the better trade. The main benefit is that risk is diminished when you trade after the fact. It is just a coin flip -- if you focus on trying to predict the news, you lose your ability to manage the level of risk.
I'll discuss this more Wednesday, but it is highly anticipated that the Fed will cut rates a quarter-point. Some market players think that the market will selloff on that news since its already so well anticipated. Maybe, but rather than place that bet now, I'd rather wait until the event occurs and then trade it. I'll formulate some strategies for different outcomes, and stay mentally prepared to react quickly.
If you are a market pundit, there is a tendency to focus on predictions rather than strategy, because they make for better headlines, but my goal is to find good trades with reduced risk. The best way to do that is to focus on trading the reaction after the event occurs.
The indexes are lackluster Tuesday, as market players do little while they wait. Don't let impatience push you to act prematurely.