When it comes to predicting how the market will react to data reports or market events, or even why it behaves the way it does, there is no “All in” or “Bet the Farm” formula for success.
You can take advantage of the fact that there is usually an initial response, which is usually brief but action-packed.
Later, after forex traders have had some time to ponder on the ramifications of the news or report on the present market, comes the second reaction.
At this step, the market determines if the news release aligned with or contradicted previous expectations, and whether it reacted accordingly.
Was the report’s outcome expected or unexpected? And what does the market’s immediate reaction tell us about the wider picture?
Answering those questions gives us a starting point for evaluating the subsequent price action.
Consensus Market Expectations
The relative agreement on impending economic or news forecasts is referred to as a consensus expectation, or simply consensus.
Leading economists from banks, financial institutions, and other securities-related companies make economic projections.
Your favorite news personality gets into the mix by surveying her in-house economist and collection of financially sound “players” in the market.
All forecasts are aggregated and averaged, and these averages display on charts and calendars to indicate the amount of expectation for that report or event.
The consensus becomes the baseline figure against which the incoming or real data is assessed.
In most cases, incoming data is identified as follows:
- “As expected” means that the reported data was near to or on par with the consensus forecast.
- “Better-than-expected” means that the reported data exceeded the consensus forecast.
- “Worse-than-expected” means that the reported data was worse than predicted.
The ability of incoming data to meet consensus is a crucial factor in influencing price behavior.
It is also critical to determine how much better or worse the actual data is than the consensus forecast. Greater degrees of inaccuracy enhance the likelihood and magnitude of price changes after the report is released.
However, keep in mind that forex traders are smart and might be ahead of the game. At least the decent ones.
Whats Priced in?
Many forex traders have already “priced in” consensus expectations into their trading and the market far in advance of the report’s scheduled, let alone release date.
The term “priced in” refers to traders who have an opinion on the result of an event and place wagers on it before the news is released.
The sooner traders price in consensus expectations, the more likely a report is to move the price. How can you know if this is the case in today’s market?
That’s a difficult one.
You can’t always tell, therefore you have to keep track of what market commentary is saying and what price action is doing before a report is out.
This will show you how much the market has priced in.
Before a report is released, a lot can happen, so keep your eyes and ears open.
Market mood might improve or deteriorate shortly before a release, so keep in mind that price can move in tandem with or against the trend.
There is always the risk that a data report can completely fail expectations, so don’t bet the farm on what others expect. When the miss occurs, you should expect to notice price fluctuation.
Prepare for such an event by expecting it (and other alternative outcomes).
Play the “What if..” game
“What if A happens?” you might wonder. What if B occurs?
“How will traders respond or alter their wagers?”
You could go much further.
What if the report comes in half a percentage point below expectations? How many pips will the price fall? What would have to happen with this report for a 40 pip reduction to occur? Anything?
Prepare your various situations and be ready to react to the market’s reaction. Being proactive in this way will keep you ahead of the competition.
They REVISED the Data, Now What?
But, yes, economic data can and will be updated.
That’s how economic reports work!
As an example, consider the monthly Non-Farm Payroll (NFP).
As previously noted, this report is issued monthly, and it usually includes changes to the preceding month’s statistics.
We’ll imagine that the US economy is in a slump and that the January NFP figure falls by 50,000, representing the number of jobs lost. It is now February, and NFP is predicted to fall by 35,000 further.
However, the incoming NFP reduces by only 12,000, which is completely unexpected.
In addition, the corrected data for January, which appears in the February report, was revised upwards to reflect only a 20,000 decrease.
When data is changed, traders must be aware of circumstances like this.
You may have had a negative reaction to an additional 12,000 job losses in February if you were unaware that January figures had been corrected.
That’s still two months of job losses, which isn’t good.
Taking into account the upwardly revised January NFP figure and the better-than-expected February NFP report, the market may be approaching a tipping point.
When incoming data is combined with last month’s updated statistics, the condition of employment looks completely different.
Make sure to determine not just whether or not altered data exists, but also the magnitude of the revision. When examining current data releases, larger modifications bear more weight.
Revisions can assist validate a prospective trend change or show no change at all, so keep an eye on what’s been released.
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