Trading the End of Easy Money

Asad Dossani

As was widely expected, the US Federal Reserve raised interest rates, for just the second time in two years. More importantly, they signaled three more interest rate increases in 2017. Does this mean the end of the Fed's easy money?

A year ago, we were in a similar situation. The Fed raised interest rates for the first time. And they said rates would go up three or four times in 2016. Needless to say, that didn't happen. So, take the three more rate increases with a grain of salt.

Regardless how many more times interest rates go up, one thing is clear. This is the beginning of the end of easy money. At least, the end of easy dollars (easy euros, pounds, and yen will stay with us for a while).

What does this mean for traders? Let's focus on commodity markets. This is where the impact will be largest. Most international commodities, such as gold and crude oil, are traded in dollars. Their value tends to move in the opposite direction to the dollar.

When the Fed increases interest rates, the dollar benefits. Investors have a greater incentive to hold dollars if they earn a higher interest rate. So if the Fed is going to continue increasing interest rates, the dollar will go up. And commodities will come down.

Lower commodities prices will be one of the big trends in 2017. This is especially true for gold. Gold is the ultimate hedge against easy money. And as the Fed raises interest rates, gold will lose its shine.

As a trader, how do you take advantage of this? Remember that fundamentals create the trends. If gold prices fall for a sustained period, there's a reason for it.

But fundamentals aren't going to help you make money in the short term. Because trading isn't just about direction. It's about timing. We have to get the timing right. We have to catch the trend before it occurs. We have to avoid the reversal when it occurs. We have to cut short our losses.

And to do this, you need a solid trading system. I like to use a quantitative approach to trading. Focus on a few indicators best placed to capture the big moves. My system has the potential to do just that.

As I said earlier, there's no guarantee the Fed will keep its promises (its track record isn't great). But traders must prepare, and be ready to take advantage.

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