11 hours to go, rate hike probability swings to ‘Yes’
Two days ago I found an interesting tool that looks at probability of a rate hike from the Federal Reserve – the CME FedWatch tool.
According to it’s data two days ago, there was 0% chance of a rate hike this month and 1.4% probability of a rate cut. Today with 11 hours and slightly over 20 minutes to go, market ‘sentiment’ or ‘rate hike probability’ has reversed to 0% chance of a cut and a 1.4% probability of a rate hike.
11 hours, 26 minutes to go
Questions for your trading psychology
What does this mean to a trader? Some food for thought:
- Would you go all in if probability of a rate hike stayed at zero based on a snapshot like the one above?
- Would you go all in if there was 10 years of data ‘proving’ that these probabilities are highly reliable?
- Would your trading strategy be any different if probability of a rate hike changed from 0 to 1.4%?
- Would your trading strategy change if the probability changed from 1.4 to 14%?
- If you already have a trade bias, how much must the probability change to make you change your mind?
- Would you agree that probabilities have little meaning to a trader because his trading outcome remains Win/Lose?
- What changed in 43 hours to shift the probability of a rate hike from 0% to 1.4%? Is it meaningful?
- If it has no outcome on your trading decision, do you still want to look at it?
(Look at it this way – when I place a trade, I have a long or short and a stop loss so I either win money or lose my bet. Just because rate hike probabilities move from 0% to 1.4% does not mean that I only lose 1.4% of my bet if I got the direction wrong.)
The CME FedWatch Tool analyses probability of FOMC rate moves using 3-day Fed Fund Futures. The Fed Funds are overnight borrowings. There is a video that claims that Central Banks like the Federal Reserve follow the market and not the opposite as we believe. Wat do you think?
43 hours ago