Trading the equity market can be a daunting task, as fluctuations generally create market noise and choppy trading conditions. Volatility is always prevalent, and finding stocks that will provide you with the upside to meet your financial goals can be difficult. Keep these 5 things in mind when trading stocks
Don’t Fight the Fed
The Federal Reserve is the US central bank, but this statement also pertains to other central banks such as the European Central Bank or the Peoples Bank of China. When a central bank is in the process of reducing monetary policy to spur on growth and inflation, stock traders should understand that these institutions are creating liquidity and attempting to increase asset prices.
When a central bank is reducing interest rates or undertaking a bond purchase program, they are in fact increasing the value of the cash flows produced by companies. For example, Exxon Mobile is a major oil company which produces cash flows which are more valuable when interest rates are declining. As interest rates decline the present value of those cash flows increases. The term “don’t fight the Fed” means that when a central bank is reducing interest rates, a stock trader should look for prices to rise and not try to short the market as their endeavors are going against the grain.
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