Top 2022 Trading Lesson: Don’t fight the Fed – Looking Beyond the Data

Throughout 2022, the Federal Reserve continued to play a major role in driving financial markets. With Central banks embarking on a journey to strangle monetary supply through restrictive tightening, the phrase ‘don’t fight the Fed’ held true. With inflation and interest rates rising simultaneously, I was reminded about how sensitive markets are to recession fears. As the economic calendar moved to the forefront of sentiment, news events became particularly important. However, prices didn’t always react the way I expected. In the same way that speculation has fueled to rise and fall of FTX, rate expectations were fueling the US Dollar, stocks, and broader sentiment.

With restrictive quantitative tightening measures expecting to ease, recession risks and interest rates could continue to drive financial markets.

Although I expect to pay close attention to monetary policy for the foreseeable future, the lessons I have learnt stem from the psychological aspects of trading. While Q1 2023 will likely bring along a unique set of challenges, I believe that risk management remains key.

While I will continue to adjust my trading plan to ensure that it is in aligned with changes in market conditions, I believe that sentiment will continue to drive prices.

If market participants expect an economic recovery, there’s a good chance that stocks will rise. If they expect a recession, stocks will likely fall. Even though I have fallen victim to picking market ‘tops’ and ‘bottoms’, I have learnt to respect the unpredictable nature of financial markets.