What is the pricing in factor?Pricing In
Human behaviour, specifically greed and impatience are some of the main reasons the markets move the way they do. The term pricing in is the definition and illustration of human impatience. Due to the fear of missing out, impatience, and greed, humans natural instinct after hearing a rumour without any solid information to back it is the buy into it.
Brexit has been causing a lot of this recently with rumours of a possible Brexit solution which causes investors to “price in” based on the rumours.
Interest rate cuts are another example where they begin to get priced in based on the rumours.
Buy the rumour, sell the news. A sentence commonly seen in the trading world. Let's imagine we have interest rate data expected to be released at 2%. The current rate is 3%. This data is seen as negative as the interest rate is dropping so many people can begin to factor that information in days prior to the release of the news. This is demonstrated by a drop in the price of the currency much earlier than the actual release. Once the data is released, it comes out at 2%, and you may notice the price does not move much. This is due to the fact that the price has dropped and been factored in prior. However, let's imagine the data released at 1.5% which is worse than expected, you can expect the value to decrease majorly. On the other hand if the data was released at 2.5%, even though the interest rate still fell from 3 to 2.5%, it is still expected to see an increase in value of the currency due to the data being greater than the expected result. In other words, when data release is unexpected, you should expect great volatility in the markets.
In the markets, it is important to always watch for the unexpected at all times. Data may be predicted to be very positive or very negative and once released it can be the total opposite. Don't get caught up in trading news as it is not suggested, however learn how to use the fundamentals to your advantage and imply them into your technical analysis.
