$Volatility: Friend or Enemy? It is a friend that can give you a great opportunity. Today, is when the US Federal Reserve Meeting will take place with a possible interest rate cut. People have been talking about this possible rate cut for weeks. If they do, it will be the first one in a decade. With all the news in the last couple of weeks, you know volatility is going to exist.
Most people tell you to stop trading until the announcement is made. Lot of people went into cash positions too. Why? Most people fear volatility. Everyone has been taught that volatility is bad and to fear it. It can wipe out profits and cause big losses. This is correct to a certain extent. If you are on the wrong side and you do not use money management, it can cause major problems. However, if used correctly, it can give a very good reward/risk.
Let’s look at the EURUSD today, an example. The interest rate decision has a high probability to cause volatility to the USD dollar. As a result, we are going to look at the EURUSD because it is at major support. Below is the daily chart of the EURUSD. You can see from the chart, the instrument has been in a consolidation pattern for awhile. Before the decision, price is right on the major support i.e. the bottom of the consolidation pattern.
We are at a critical support with volatility. In order to take advantage of it, you have to use a system designed to handle volatility. If you do not, you are gambling and have potential for huge losses. For us, we are going to use Heiken-Ashi (www.heiken-ashi.com). It is designed solely for volatility.
Below is the Heiken-Ashi.com chart for the 60m time frame.
At 2am EST, price retested the high at 1.1160 and it held. It confirmed the bearish chart setup from the daily and it hours away from the Fed Announcement. Based on the trading plan, we waiting for a strong HA candle. We got it early this morning at 5am and entered at 6am EST at price of 1.1146 with a HA stop of 1.1151. This is based on our trading plan.
With volatility, we are looking for high reward/risk. The target was 1.1101 giving a 747% reward/risk. The chart setup is shown below:
The trade still existed during the announcement. During the announcement, price got the target that was plan.
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