For Currency Traders, the Reaction is as important as the News
Author Mr. Zahir.,
For Currency Traders, the Reaction is as important as the News.
For currency traders who are trading on the news, it is important to remember that the reaction of the markets to it is what is important. There are usually two cycles of reactions to a particular piece of news. The initial reaction is usually when the markets are at their most volatile, but is also short-lived. Once the news has had time to settle in, the second reaction cycle comes in, when traders have had time to reflect and would react in a more measured way.
Before the release of an economic indicator, there is usually a consensus among market participants as to what it will be. Various financial and securities institutions release forecasts made by leading economists while news outlets do surveys of experts as well as their in-house economists. Brokers then aggregate these forecasts and average them, and these appear on the economic calendars that they publish on their sites.
Once the actual release is made, the reaction to it can be classified in the following ways:
• As expected. The release matched or was close to the consensus.
• Better than expected.
• Worse than expected.
You can estimate price action in the markets based on what the reaction is. You should also consider just how close or far the release is to the consensus forecast. The higher the divergence, the more likely it is that there will be a strong market reaction. However, the best forex traders will have already factored in the consensus reactions into their trading decisions before the report is released. For Currency Traders, the Reaction is as important as the News.
In order for you to be able to do this, you need to monitor the commentary of market analysts prior to the release of the report as well as what the price action is in the markets. It is also worth keeping in mind that market sentiment can change quickly just prior to the release of a report, which can cause prices to move in line with or against it. For Currency Traders, the Reaction is as important as the News.
You can also start planning your trades based on “what-if” scenarios. Consider not just the three possibilities enumerated above but also what if the release was much worse or much better than expected. Make plans as to how you will react if each of these scenarios were to take place.