7 Winning Strategies For Trading Forex
Are expectations being met?
Even before actual economic data is released, the market already has its own estimate of what the figures could be based on the media’s interview of analysts and economists, as well as the internal work of analysts in the major trading institutions such as banks or funds. For example, the consensus for an upcoming US consumer confidence survey is for the index to show a worse figure compared to the previous month. And way before that same survey result is released, the market has already priced that expectation into the exchange rate of, say the EUR/USD, which has been rallying due to the resulting weak USD sentiment. Now, what will really move the EUR/USD at the point of that consumer confidence release is the amount of deviation between expectations and the actual news.
If the released figure comes out just as expected by the market, it is already old news to traders, as they have already factored that into the currency price beforehand. Such anticipated news or economic data does not cause any surprise in the market as they merely confirm prior expectations. In fact, the release of anticipated news or data often can cause the currency price to move in the opposite direction of where the market has largely positioned itself before the news. So, for example, if the US consumer confidence headline figure turns out to be almost identical to the market’s expectations, EUR/USD may even end up declining, with USD strengthening even in the face of a negative consumer confidence number. This contrarian market reaction is the result of traders who have gone long on the EUR/USD closing their positions and taking profits upon the news release. Thus, the lack of any deviation of expectations from the actual news or data can either cause a currency pair to move sideways or to move in the opposite direction as the status quo remains, and there is no shift of expectations from the news itself. The explosive market reaction
What will really move the market in a huge and dramatic way is when there is a large deviation between expectations and the actual news or data release. An unanticipated news or outcome of a data release that contradicts the prevailing market consensus will trigger a big move. Let’s say a certain figure is expected for the US payrolls, and the actual number turns out to be less than the expected figure, the US dollar is likely to fall against another currency upon the news release (see the following chart). This new and unexpected piece of information will cause a big shift in traders’ mindsets, and prompt them to re-adjust their existing positions or to open new positions in line with the US fundamentals.
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