Why price moves: events, non-events and sentiment
Three things move a price, and only one of them is printed in advance. Everything else in this branch is one of those three opened up.
Lesson 1 of 12. It assumes no economics — every term is defined where it first appears.
What this branch is for
A chart tells you what a price did. It is very good at that, and it cannot tell you why. Two pairs with the same structure behave differently when one currency pays four per cent more than the other, and nothing on the chart says so.
Fundamental analysis is the other half: the release, the rate, the curve that anticipated the release, and the positioning that decided how far the reaction ran. None of it replaces reading a chart. It tells you which side of the chart to be on before the chart has an opinion.
- It does not predict a price. It explains a cause, and causes repeat.
- It works on a longer clock than a chart pattern — hours and days, not minutes.
- It is the only half that can tell you a move is coming before it starts, because most of it is scheduled.
Three causes, and only one is on the calendar
Price movement in any market comes from three places. The split is worth learning first because the rest of this branch is simply each box opened up in turn.
Events are scheduled: a rate decision, an inflation print, an employment report. The date and the minute are published weeks ahead, the market has a forecast, and the only unknown is the number itself.
Non-events are not scheduled: a central banker says something unplanned, a pipeline shuts, a bank fails. Nothing warned you, and the reaction is usually faster and less orderly than a scheduled release.
Sentiment is not an occurrence at all. It is what the market already believed when the other two arrived, and it decides whether a given number is bought or sold. It is the reason a good figure sometimes sells off, and it is covered on its own in lesson eleven.
- Events — scheduled, forecast, and tradeable because you know when they land.
- Non-events — unscheduled, faster, and the reason a stop matters more than a target.
- Sentiment — the standing position of the crowd, which decides how the other two land.
The number does not move the price. The surprise does.
This is the single most useful idea on the page, and it is the one most often got wrong. Every calendar entry carries three figures: what the measure was last time (previous), what the market expects this time (forecast), and what it turned out to be (actual).
By the time the release lands, the forecast is already in the price. Everyone who wanted to position for it has done so. What is not in the price is the difference between the forecast and the actual — and that difference is what the market has to reprice.
So a growth figure of 1.8 per cent is not good news or bad news. It is good news against a forecast of 1.4 and bad news against a forecast of 2.2, and the same number will produce moves in opposite directions on those two days.
- Read the calendar as three columns, never one. A headline that quotes only the actual has thrown away the half that matters.
- A large miss on a minor release can move more than a small miss on a major one.
- When the actual matches the forecast exactly, the usual reaction is a fade — the positioning taken on before the release comes back off.
What the market is not
Three explanations come up constantly and all three are wrong in the same way: each one ends the enquiry instead of starting it.
“Trading is luck.” If the outcome were luck, the same release would produce random directions. It does not. A rate rise that beats its forecast strengthens the currency far more often than not, and the exceptions have reasons of their own — usually the sentiment already in place, which is a mechanism rather than a coin toss.
“Big players decide where price goes.” The first half is true and the second does not follow. Size moves price, in this market as in any other. But size is positioned by the same data everyone else is reading, and a large position facing the wrong way is the most reliable fuel a move can have.
“It is a casino.” A casino has a fixed, known, negative expectation that no amount of study changes. A market has a cause for every move, published on a schedule, and studying it changes your results. The comparison is almost always made after a loss, and it is doing a job — it explains the loss without requiring anything to change.
The monkey, and what the story actually shows
The best-known version of the luck argument is worth taking seriously because it came from a serious source. In A Random Walk Down Wall Street (1973), the Princeton economist Burton Malkiel argued that a blindfolded monkey throwing darts at the financial pages could pick a portfolio that would do as well as one chosen by experts.
The reply is more interesting than the claim. Rob Arnott of Research Affiliates tested it and reported that the dart-throwing portfolios did not merely match the experts — they beat both the experts and the index. That sounds like a stronger case for randomness until you ask why, and the answer is that random selection systematically overweights smaller companies, which happened to be the winning tilt over the period tested. The monkeys were not lucky. They were accidentally running a factor strategy.
Which is the point worth carrying into the rest of this branch. A result that looks random usually means the cause has not been identified yet, and “random” is a statement about the observer rather than about the market. It is also worth noting what the experiment tested: picking a basket of shares and holding it. It says nothing at all about whether a currency will rise on Thursday afternoon when its central bank moves the interest rate, which is the question this branch is about.
What to take from this one
Three things, in the order they matter:
- Every move has a cause, and the causes sort into three boxes: scheduled events, unscheduled events, and the sentiment that decides how both are received.
- What moves the price is the distance between the forecast and the actual, not the actual. A calendar entry read as one number has been read wrong.
- The scheduled box is the only one you can prepare for, and it is where nearly all of this branch lives: GDP, the dollar index, rates, the curve, PMI, employment, retail sales and inflation are all events with a published time.
Next: what you are actually trading
Seven markets, their sub-types, and the contract-for-difference that lets one account reach all of them — including what a CFD is not.