For the past few years, interest rates in the US have been as low as they can realistically go, so there is no other option but for them to rise at some point. When this rise will occur is open to a lot of debate from economists and other experts who typically adjust their projections as economic indicators dictate. We all know that rates will rise at some point, which, generally speaking, is a good thing because it is an indication that our economy is strengthening. The Federal Reserve will raise the interest rate to keep inflation in check. So far they have been very lucky because inflation has not been an issue, which means that they have been able to leave the interest rate untouched. This is not something that will last forever; rising interest rates is something that we, investors and traders, should begin to plan for so we won’t be surprised when it finally does happen.

You could go about your trading and investing business without concerning yourself with any of this, but doing nothing, and letting your investment holdings go where they go when the inevitable rate hike occurs, is a little like being an ostrich with its head. A rate hike will undoubtedly affect the market, regardless of the market that you are in at the time. If you are on the wrong side of the move that it makes, it could end very badly for you. You could also listen to the experts, assuming that, since they are experts, they will be able to forecast when rates are likely to rise. This thought process has several flaws in it, with the most obvious one being that the experts really aren’t all good at predicting much of anything. Leaving your accounts or your portfolio at the mercy of what they may be able guess at seems like this choice could end very badly for you as well.

Being prepared ahead of the rate hike seems like it may be the best possible choice that could be made. If the economists and experts accurately guess at when the rate hike will occur, the market will react when the guesses are made, incorporating that information into the markets pricing. If they guess right, when the rate hike does occur, there will still be an effect on the markets, but it may be a minimal effect; it will not be as great as if the rate hike comes as a surprise. If the rate hike happens when nobody is expecting it, the markets will likely react in a very violent manner, as they have done in the past. There could be instant gapping of several hundred pips in the Forex market, which is great if you are on the right side of the gap, but potentially devastating if you are not. Remember that Forex brokers do not guarantee stops; they will try to get you out at the next possible price, but if a gap blows through your stop, you could get stopped out a few hundred pips worse than what you had planned on. The stock market may react violently as well, likely making very large moves; though with all of the government control and manipulation that has taken place in that market over the past several years, any sharp move may be softened a bit.

The question is how do we prepare for something that we know will happen, but we have no idea when it will happen? Listening to what the Fed officials say is important because they will indicate what they are thinking and paying attention to the news is important as well. The better the economic indicators get, the more likely it is that a rate hike will occur in the near term. In the past, before 2008, the main reason that traders looked at the economic reports each month was to get a feel for what the Fed would likely do with the short-term interest rate. When the rate was effectively reduced to zero when the recession began, the reports regarding employment and housing became more important since no change in interest rates was really possible from that point forward. The US economy is getting a little healthier, which makes it inevitable that rates will rise. This means that when the interest rate begins to move, it is likely that all other economic reports will once again become secondary to the interest rate report. Do not take the first interest rate move lightly; if you are in, virtually, any US market when rates change for the first time, you will be affected, at least to some extent.