| | | | Why a Rate Cut Right Now Could Be Bearish — and Inflationary
One of the biggest mistakes I see traders making over and over is not knowing when to get out of a trade that isn't working. They get married to their position, doubling and tripling down as it moves against them.
This is a surefire way to rack up huge losses.
As I said in today’s edition of Morning Monster…
It's not being wrong that costs you big money. It's staying wrong.
You have to be willing to admit when a trade isn't going your way and cut your losses. Don't stubbornly hold on, hoping it will turn around. More often than not, that will lead to your position spiraling out of control.
Instead, have a clear plan for where you'll get out if the trade goes against you. Set your stop loss and stick to it. And don't be afraid to take the loss — it's better to lose a little than lose a lot. As I mentioned, if you stay wrong, you're going to ride it all the way down here...
And if you double down here, then you're really screwed.
That isn’t true 100% of the time. And, sure, you’ll occasionally be able to crawl your way back into the black. But far more often than not, you’ll only get yourself into more trouble.
Trading is all about managing risk. You have to be willing to take small losses to protect your capital. That way, you live to trade another day. The traders who get greedy and refuse to cut their losses are the ones who end up blowing up their accounts.
That said, let’s talk about the Fed’s next move…
Of course, one of the big events we're all watching this week is the FOMC meeting and the Fed's decision on interest rates. As I said in the video, I think the market is expecting a 0.5% rate cut. But I'm not so sure that's what we'll get.
The Fed aggressively raised rates to combat inflation. And right now, the real Fed funds rate is a full 1.8 percentage points above the market rate. That's a huge gap, and it's highly unusual. Historically, when the Fed's rate has gotten that far out of sync with the market, it's been a sign of financial stress.
So I wouldn't be surprised if the Fed only does a 0.25% cut on Wednesday. That could disappoint the market, which is pricing in a larger 0.5% cut. If that happens, we could see a sell-off as traders are let down.
Ultimately, I think any rate cut, even a smaller one, is going to be inflationary. That's bearish for the dollar, which is already showing signs of weakness. So I'd be cautious about taking on too much long exposure ahead of the FOMC decision.
Trading is all about managing risk and having the discipline to cut your losses. It's not easy, but it's essential if you want to be successful in the markets long-term. And with a big Fed decision looming, it's more important than ever to have a strategic, unemotional approach.
I'll be watching the markets closely this week and sharing my insights on my two shows. And don't forget, I'll be doing a live stream at 5 p.m. today taking your requests, so be sure to tune in at the link below! Let me know if you have any other questions.
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