In this episode of Truth About FX, Walter talks about expectations and how this affect your trading, and when should you — or shouldn’t — rely on current events to anticipate the future.
Download (Duration: 03:16/ 3.74 MB)
In This Episode:
00:31 – news related
01:38 – pure chart
02:01 – expectations
It’s all about expectations. [Click To Tweet].
It’s how those numbers line up with what people think that’s going to happen. [Click To Tweet].
We only take a trade if there’s a surprise in the number. [Click To Tweet].
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Alright, Walter, this is a question that I had when I first started and I’m sure other people have also. This relates to news so when good news comes out, good things are supposed to happen to currency pair. For example, if bad news came out in Japan but the USD/JPY went down, what the heck? Why does that happen?
Walter: It’s interesting, isn’t it? Where sometimes you will get news and you think it should affect the currency one way but it doesn’t and it goes in other way. What people will often say is it’s really about the expectations.
When we trade the Non-farm payroll, for example, what we do is we only take a trade if there’s a surprise in the number. We know what the economist think are going to be the numbers of the Non-farm payroll. If it’s an enough of the gap between the real numbers when they release and the expected average numbers that they polled economist say, then we have a trade.
It’s the same thing. Now, I will hand on heart tell you right now I am not a fundamental trader, I don’t go for fundamentals, I don’t try and interpret fundamentals. I just go with the chart. I’m at as close to a pure chart as it is you’ll ever find.
However, I do know that when these things happen, what the fundamental analyst often point to is “well, yeah it was bad news for the JPY” but, it wasn’t as bad as they thought it would be.
These are the sort of things… like, recently a couple months ago or month ago, they didn’t cut rates on the AUD. Their expectations were that they were probably to keep continuing to cut rates even if it didn’t do last time around, maybe they’re going to do it in the next couple of months but they left the line out. They didn’t raise rates, they didn’t cut rates.
They did nothing but they left out this line that they usually say. The Reserve Bank of Australia usually says “…and we will continue to monitor the situation and keep on top of the cash rate or blah, blah, blah”.
They just left that line out so everyone thought “oh, maybe they’re done cutting rates so the AUD just spiked up”. It doesn’t make any sense. Why would the AUD spike up when they didn’t cut rates? They didn’t do anything. They didn’t actually say that they weren’t going to cut rates in the future, they just didn’t say that they’re going to keep monitoring it.
That sort of things. It’s all about expectations. When you’re looking at these things, you try to make sense to them. It’s often the case that the expectations of the market are what dictates the reaction, not necessarily in numbers. It’s how those numbers line up with what people thought what’s going to happen. There you go so, hopefully that makes sense.
Hugh: Great explanation. Thanks, Walter.
Walter: See you.
Hugh: See you.