There's
no one "All in" or "Bet the Farm" formula for success when
it comes to predicting how the market will react to data reports or market
events or even why it reacts the way it does.
You can
draw on the fact that there's usually an initial response, which is usually
short-lived, but full of action.
Later on
comes the second reaction, where traders have had some time to reflect on the
implications of the news or report on the current market.
It's at
this point when the market decides if the news release went along with or
against the existing expectation, and if it reacted accordingly.
Was the
outcome of the report expected or not? And what does the initial response of
the market tell us about the bigger picture?
Answering
those questions gives us place to start interpreting the ensuing price action.
Consensus Expectations
A
consensus expectation, or just consensus, is the relative agreement on upcoming
economic or news forecasts. Economic forecasts are made by various leading
economists from banks, financial institutions and other securities related
entities.
Your
favorite news personality gets into the mix by surveying her in-house economist
and collection of financial sound "players" in the market.
All the
forecasts get pooled together and averaged out, and it's these averages that
appear on charts and calendars designating the level of expectation for that
report or event.
The
consensus becomes ground zero; the incoming, or actual data is compared against
this baseline number. Incoming data normally gets identified in the following
manner:
·
"As expected" - the reported data was close to or at the consensus forecast.
·
"Better-than-expected"- the
reported data was better than the consensus forecast.
·
"Worse-than-expected" - the reported data was worse than the consensus forecast.
Whether
or not incoming data meets consensus is an important evaluation for determining
price action. Just as important is the determination of how much better or
worse the actual data is to the consensus forecast. Larger degrees of
inaccuracy increase the chance and extent to which the price may change once
the report is out.
However,
let's remember that forex traders are smart, and can be ahead of the curve.
Well the good ones, anyway.
Many
currency traders have already "priced in" consensus expectations into
their trading and into the market well before the report is scheduled, let
alone released.
As the
name implies, pricing in refers to traders having a view on the outcome of an
event and placing bets on it before the news comes out.
The more likely a report is to shift the price, the sooner traders will price in consensus expectations. How can you tell if this is the case with the current market?
Well,
that's a tough one.
You can't
always tell, so you have to take it upon yourself to stay on top of what the
market commentary is saying and what price action is doing before a report gets
released. This will give you an idea as to how much the market has priced in.
A lot can
happen before a report is released, so keep your eyes and ears peeled. Market
sentiment can improve or get worse just before a release, so be aware that
price can react with or against the trend.
There is
always the possibility that a data report totally misses expectations, so don't
bet the farm away on the expectations of others. When the miss occurs, you'll
be sure to see price movement occur.
Help
yourself out for such an event by anticipating it (and other possible outcomes)
to happen.
Play the
"what if" game.
Ask
yourself, "What if A happens? What if B happens? How will traders react or
change their bets?"
You could
even be more specific.
What if
the report comes in under expectation by half a percent? How many pips down
will price move? What would need to happen with this report that could cause a
40 pip drop? Anything?
Come up
with your different scenarios and be prepared to react to the market's
reaction. Being proactive in this manner will keep you ahead of the game.
What the Deuce? They Revised the Data? Now what?
Too many
questions... in that title.
But
that's right, economic data can and will get revised.
That's
just how economic reports roll!
Let's
take the monthly Non-Farm Payroll employment numbers (NFP) as an example. As
stated, this report comes out monthly, usually included with it are revisions
of the previous month's numbers.
We'll
assume that the U.S. economy is in a slump and January's NFP figure decreases
by 50,000, which is the number of jobs lost. It's now February, and NFP is
expected to decrease by another 35,000.
But the
incoming NFP actually decreases by only 12,000, which is totally unexpected.
Also, January's revised data, which appears in the February report, was revised
upwards to show only a 20,000 decrease.
As a
trader you have to be aware of situations like this when data is revised.
Not
having known that January data was revised, you might have a negative reaction
to an additional 12,000 jobs lost in February. That's still two months of
decreases in employment, which ain't good.
However,
taking into account the upwardly revised NFP figure for January and the better
than expected February NFP reading, the market might see the start of a turning
point.
The state of employment now looks totally different when you look
at incoming data AND last
month's revised data.
Be sure
not only to determine if revised data exists, but also note the scale of the
revision. Bigger revisions carry more weight when analyzing the current data
releases.
Revisions
can help to affirm a possibly trend change or no change at all, so be aware of
what's been released.