For those of us with the kind of active trading strategies Adam referenced yesterday, we don’t really care what stokes volatility, so long as it’s there.

That’s why over the past year or so I’ve been hammering on and on about the Fed, market surprises and how subscribers of Treasury Profit Accelerator (formerly Dent Digest Trader) have profited when the U.S. Treasury Bond market moves.

And since the Fed is likely to raise rates for the first time in nearly 10 years, I’m going to give you a peek under the hood of my system… because this is a market event that could really shake things up.

Like I’ve mentioned on numerous occasions, while I might disagree with what the Fed does, it doesn’t really matter. My system runs and thrives on volatility, not asinine monetary policies.

It responds especially well to excessive volatility, the kind that often results from a market surprise. When the markets are caught off guard, you’ll often see a quick overreaction in asset prices, especially Treasury bonds. And that’s how we position to make quick profits!

In my 20+ years in this business, I’ve certainly observed these reactions many times. But a Fed study actually backs me up…

In the August 2008 Federal Reserve Bank of New York publication Current Issues in Economics and Finance, a study named “How Economic News Moves Markets” supports the idea that certain economic releases impact asset prices.

The study went on to say that while these releases have an uneven effect on all classes of assets, “…unexpected changes in data have the most marked impact on interest rates…”

So we know that Treasury bonds can overreact to scheduled economic release dates. Now we just need to figure out what an overreaction in prices is, mathematically.

Don’t worry, I’m not going to get into the math. Basically, it includes the historical trading ranges for the ETF that tracks the long-term Treasury bond index, and a measurement of volatility (standard deviation based on a simple moving average).

The calculation also sets a daily price ceiling and a floor. So, if the surprise moves the price over or under the calculated range, it triggers a trade alert.

I’ll illustrate with the most recent example from just last week. I alerted Treasury Profit Accelerator subscribers on Tuesday afternoon that a lower limit calculation had been violated.

This means the system had identified an overreaction in price, and that we should bet on it going back up:

ENM 12-10-15 Chart 1

Since the price violated its lower limit, the system told us that we need to buy call options on the ProShares UltraShort 20+ Year Treasury (TBT), the ETF we track for short-term, “snap-back” trades.

That lower price limit was $43.38 on December 1. The low of the day was $43.00, which triggered the trade alert for us to execute within 30 minutes of the opening bell the next day.

Okay, now what? We bought call options on the ETF and are looking for a “snap-back.” So how do we know when to get out?

Basically, we’re looking for the price to return to the mean, or average, which is why the algorithm also calculates the daily “mid-point.” I’ve included that element in the chart here:

ENM 12-10-15 Chart 2

When the price touches that level, we send a trade alert to take immediate profits. If there’s time left in the trading day, we get out right away. If not, we set the trade up for the next morning.

In the example above, the alert was triggered and sent to subscribers at about noon, so there was plenty of time to close our call options for a quick 76% return. That whole trade lasted a little more than 24 hours!

Along with my algorithm that identifies trade alert triggers, I developed a number of rules that help manage risk, maximize profits and ignore trade alerts that are triggered when market conditions (volatility) aren’t present.

We keep it simple: I tell you when to buy with a “buy-up-to” price and when to sell. And for the short-term or snap-back strategy, you’re never in the market for more than two weeks.

Even though we only get one or two trade alerts a month, they are high probability trades. In fact the last six of eight trades have been winners! That’s 75% winners in the last six months or so. Not bad, if I do say so!

Even though investors seem pretty confident in a rate hike next week, there’s still a lot of variables.

How many times will the Fed raise rates thereafter, and how frequently? Will it be a one-and-done, like Harry says? Will it shake up the stock market? Will deflationary economic headwinds come back to bite the Fed in the rear?

There’s a ton of “what ifs,” and as the markets sort these issues out, there’s bound to be plenty of volatility for us to profit on. You can subscribe to my Treasury Profit Accelerator to see how I have my readers positioned for it.

Lance Gaitan
Editor, Dent Digest Trader

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Lance Gaitan
Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.