Interest Rate Trading (Manually Added Rate Decisions) [TANHEF]

18 ก.ย.

Interest Rate Trading: How Interest Rates Can Guide Your Next Move.

How were interest rate decisions added?
All interest rate decision dates were manually retrieved from the 'Record of Policy Actions' and 'Minutes of Actions' on the Federal Reserve's website due to inconsistent dates from other sources. These were manually added as Pine Script currently only identifies rate changes, not pauses.

█ Simple Explanation:
This script is designed for analyzing and backtesting trading strategies based on U.S. interest rate decisions which occur during Federal Open Market Committee (FOMC) meetings, to make trading decisions. No trading strategy is perfect, and it's important to understand that expectations won't always play out. The script leverages historical interest rate changes, including increases, decreases, and pauses, across multiple economic time periods from 1971 to the present. The tool integrates two key data sources for interest rates—USINTR and FEDFUNDS—to support decision-making around rate-based trades. The focus is on identifying opportunities and tracking trades driven by interest rate movements.

█ Interest Rate Decision Sources:
As noted above, each decision date has been manually added from the 'Record of Policy Actions' and 'Minutes of Actions' documents on the Federal Reserve's website. This includes +50 years of more than 600 rate decisions.

█ Interest Rate Data Sources:

• USINTR: Reflects broader U.S. interest rate trends, including Treasury yields and various benchmarks. This is the preferred option as it corresponds well to the rate decision dates.
  
• FEDFUNDS: Tracks the Federal Funds Rate, which is a more specific rate targeted by the Federal Reserve. This does not change on the exact same days as the rate decisions that occur at FOMC meetings.
  

█ Trade Criteria:
A variety of trading conditions are predefined to suit different trading strategies. These conditions include:

• Increase/Decrease: Standard rate increases or decreases.
  
• Double/Triple Increase/Decrease: A series of consecutive changes.
  
• Aggressive Increase/Decrease: Rate changes that exceed recent movements.
  
• Pause: Identification of no changes (pauses) between rate decisions, including double or triple pauses.
  
• Complex Patterns: Combinations of pauses, increases, or decreases, such as "Pause after Increase" or "Pause or Increase."
  

█ Trade Execution and Exit:
The script allows automated trade execution based on selected criteria:

• Auto-Entry: Option to enter trades automatically at the first valid period.
  
• Max Trade Duration: Optional exit of trades after a specified number of bars (candles).
  
• Pause Days: Minimum duration (in days) to validate rate pauses as entry conditions. This is especially useful for earlier periods (prior to the 2000s), where rate decisions often seemed random compared to the consistency we see today.
  

█ Visualization:
Several visual elements enhance the backtesting experience:

• Time Period Highlighting: Economic time periods are visually segmented on the chart, each with a unique color. These periods include historical phases such as "Stagflation (1971-1982)" and "Post-Pandemic Recovery (2021-Present)".
  
• Trade and Holding Results: Displays the profit and loss of trades and holding results directly on the chart.
  
• Interest Rate Plot: Plots the interest rate movements on the chart, allowing for real-time tracking of rate changes.
  
• Trade Status: Highlights active long or short positions on the chart.
  

█ Statistics and Criteria Display:

• Stats Table: Summarizes trade results, including wins, losses, and draw percentages for both long and short trades.
  
• Criteria Table: Lists the selected entry and exit criteria for both long and short positions.
  

█ Economic Time Periods:
The script organizes interest rate decisions into well-defined economic periods, allowing traders to backtest strategies specific to historical contexts like:

• (1971-1982) Stagflation
  
• (1983-1990) Reaganomics and Deregulation
  
• (1991-1994) Early 1990s (Recession and Recovery)
  
• (1995-2001) Dot-Com Bubble
  
• (2001-2006) Housing Boom
  
• (2007-2009) Global Financial Crisis
  
• (2009-2015) Great Recession Recovery
  
• (2015-2019) Normalization Period
  
• (2019-2021) COVID-19 Pandemic
  
• (2021-Present) Post-Pandemic Recovery
  

█ User-Configurable Inputs:

• Rate Source Selection: Choose between USINTR or FEDFUNDS as the primary interest rate source.
  
• Trade Criteria Customization: Users can select the criteria for long and short trades, specifying when to enter or exit based on changes in the interest rate.
  
• Time Period: Select the time period that you want to isolate testing a strategy with.
  
• Auto-Entry and Pause Settings: Options to automatically enter trades and specify the number of days to confirm a rate pause.
  
• Max Trade Duration: Limits how long trades can remain open, defined by the number of bars.
  

█ Trade Logic:
The script manages entries and exits for both long and short trades. It calculates the profit or loss percentage based on the entry and exit prices. The script tracks ongoing trades, dynamically updating the profit or loss as price changes.

█ Examples:
One of the most popular opinions is that when rate starts begin you should sell, then buy back in when rate cuts stop dropping. However, this can be easily proven to be a difficult task. Predicting the end of a rate cut is very difficult to do with the the exception that assumes rates will not fall below 0.25%.

2001-2009
Trade Result: +29.85%
Holding Result: -27.74%
https://www.tradingview.com/x/BLd9lB9C/

1971-2024
Trade Result: +533%
Holding Result: +5901%
tradingview.com/x/nZqCge7S/

█ Backtest and Real-Time Use:
This backtester is useful for historical analysis and real-time trading. By setting up various entry and exit rules tied to interest rate movements, traders can test and refine strategies based on real historical data and rate decision trends.
This powerful tool allows traders to customize strategies, backtest them through different economic periods, and get visual feedback on their trading performance, helping to make more informed decisions based on interest rate dynamics. The main goal of this indicator is to challenge the belief that future events must mirror the 2001 and 2007 rate cuts. If everyone expects something to happen, it usually doesn’t.

18 ก.ย.

เอกสารเผยแพร่

Improved indicator settings (enhanced layout, better defaults, fewer unnecessary holding result options). Minor bug fixes.

19 ก.ย.

เอกสารเผยแพร่

Added more entry/exit criteria for interest rate thresholds. This is especially useful in testing specific rate changes.

26 ก.ย.

เอกสารเผยแพร่

Major update: Now featuring the option to 'Allow Multiple Active Trades (Pyramid Entries)', which works seamlessly with 'Max Trade Duration (Bars)'. This is ideal for testing the impact of specific rate changes, like a 50bps cut.

I’ve backtested 50bps rate cuts and other strategies in this idea (select chart below):