Fundamental analysis Macroeconomic indicators

"Drift" of Metals Before FOMC Meetings

Elena Berseneva 18 july 2022 93 4

We have identified the effectiveness of the FOMC “drift” effect in forecasting the US stock market and the oil and gas segment. Studies have shown that US indices, stocks, oil and gas are rising 24 hours before FOMC meetings.

 

Today we will study how precious metals react to the upcoming FOMC meetings.

Hypothesis
To conclusion

Gold, Silver and Palladium are rising 24 hours before FOMC meetings.

К выводам
Data used

Timeframe: H1


Financial instruments


Period: April 2006 – June 2022


Signals to enter the market: 358

Strategy


Opening a long position on instruments:

  • at the opening of an hour, 8 hours before FOMC meetings;
  • at the opening of an hour, 12 hours before FOMC meetings;
  • at the opening of an hour, 24 hours before FOMC meetings;
  • at the opening of an hour, 36 hours before FOMC meetings;
  • at the opening of an hour, 48 hours before FOMC meetings.


Closing a position at the end of the hour just before FOMC meetings.



The strategy will be evaluated according to the following criteria:

 

  • The average rate of return reflects the relative change in the quotes of financial instruments in percentage. A positive value of the rate of return indicates the profitability of the strategy, a negative one indicates a loss. 


The average rate of return (R) of a financial instrument is calculated using the formula:

where:

n is the number of trades;

 

P (%) – the percentage of change in the quote of a financial instrument at the time of fixing a position, is calculated as follows:

 

for buy positions

P (%) = (position closing price - position opening price) / position opening price * 100%

 

for sell positions

P (%) = (position opening price - position closing price) / position opening price * 100%

 

  • The total rate of return (TR) is the sum of the profits from all trades. The greater the value of the total rate of return, the greater the profit brought by the signal during its testing period. 
  • Maximum drawdown (MaxDD) is the maximum loss in percentage terms from fixing unprofitable trades for the entire testing period. The lower the value of the maximum drawdown, the better the trading signal works.

where:

n – number of trades;

TRn – total rate of return of n trades;

DDn – drawdown at the time of closing the n-th trade;

MaxDD – maximum drawdown.




Analysis of the obtained results


Let's look at the strategy testing results:

So, as expected, metals are rising 24 hours before FOMC meetings. The average rate of return of the segment is 0.3% with a maximum drawdown not exceeding 15%.

 

The rate of return of the strategy with entering the market 36 hours before the FOMC meetings is slightly inferior and amounts to 0.27%. And the maximum drawdown of such an entry into the market increases on average by 1.5-2 times.



Let's see how the average rate of return of the strategy will change when closing positions after FOMC meetings:

As you can see, the FOMC “drift” effect for the metals segment is active not only before the meetings, but also within 12 hours after the meetings, and also intensifies 8 hours after the meetings.

 


Let's compare market exit strategies just before FOMC meetings and 8 hours after the meetings:

With small differences in the average rate of return of this segment, let's pay attention to the maximum drawdown of instruments. And note that the minimum losses according to the results of testing fall on entering the market 24 hours before FOMC meetings and exiting the market 8 hours after the meetings.

 

With the specified strategy parameters, silver has shown an average rate of return of about 0.6%, gold and palladium have shown an average rate of return of about 0.3%. Silver reacts better to the effect under consideration.

Conclusion

Metals are rising 24 hours before FOMC meetings.


The FOMC “drift” effect for the segment is active not only before the meetings, but also within 12 hours after the meetings, and also intensifies 8 hours after the FOMC meetings. At the same time, the minimum losses according to the results of testing fall on entering the market 24 hours before the meetings and exiting the market 8 hours after the meetings.



The effectiveness of the FOMC “drift” effect for the metals segment has been identified.

Detailed results are shown in the Appendix:

XLSX (0.05 MB)Drift of metals before FOMC meetings.xlsx

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