2Market’s reactions to news
Another way for traders to gauge the market sentiment is by analyzing how the
market responds to unanticipated news
The forex market is very efficient at discounting future expectations by
incorporating them into current prices. Very often, when news comes out better
than is expected by economists and analysts, the currency of that country is more
likely to soar against another currency. When the news is worse than expected, that
currency is more likely to fall against another currency
However, if the news or data turn out to be worse than expected and still the
currency price soars, that is, the market reacts in a very bullish way to worse than
expected data, a bright red flag should be waving at you. The opposite situation also
applies: if price action remains very bearish to much better than expected news, it
signals a highly suspect price move
In short, you should look out for a contrarian market reaction to better or worse than
expected news. Under these circumstances, it is better to assume that the price
move is hardly supported by substance, and could reverse sometime soon.Abullish
price move that is not accompanied by evidence will soon be due for a reality
check, just like a bearish price move that is not accompanied by evidence is very
likely to be corrected very soon. If you day trade the forex market, you may judge
the market’s reaction based on one piece of news, but if you position trade, monitor
the market’s reactions to several news to see if the responses are still contrary
For example, if a piece of news turns out to be worse than expected, and assuming
that there are no pre-release rumours or leaks of the news, and the currency pair
rallies to break above a significant resistance level, you have reasons to suspect that
the breakout move is likely to be false and unsustainable. Even if the currency pair
manages to make new highs later on, you should be prepared for a possible trend
reversal very soon. Monitoring the market’s reactions to news can enable traders to
identify corrective moves in the forex market
Not all news items get the same amount of attention from big market players; news
relating to the job or housing market usually get more attention. The relative
.significance of news will vary from time to time