the consensus view can be gained from the activity surrounding
economic data releases—but this time from the
activity in advance of the release. Surveys are readily available
from media services that quantify the expected responses to the
release of each specific data item. While the consensus number
is valuable in determining the net view of the overall market, it
is also worth looking a little deeper. If you examine the details,
these surveys usually show how many forecasters are bullish and
how many are bearish. They also show whether there is a wide
divergence in expectations or relative agreement among participants.
If the forecasts are grouped tightly together, it suggests
that the market has a high degree of confidence.
From a trading perspective, this means that an unexpected
outcome should have a major impact on the price of the
underlying currency or stock, or on the market as a whole. If a
significant majority of forecasts are bullish, for example, a bullish
outcome is likely to have less market impact than a bearish
result. It is the nature of the economic release relative to the
consensus expectation, combined with the price action after
the release, that provides the best available guide to overall
market positioning in a particular stock or currency. Once the
process of market positioning is understood, this knowledge
can be used by warrior traders to profit in similar situations in the future.
Concentration within Consensus
Knowing how to read and act based on the degree of concentration
within consensus is the mastering of this art. The consensus
forecast for any economic data release is just a number,
and this will be adopted as the overall market consensus. While
it looks the same for every release, there are secrets within.
There are often quite significant differences (and distinctions)
in the detail behind various consensus forecasts. I call this
the degree of concentration within the consensus. Regardless of
whether there is a wide range of forecasts that are evenly distributed
or a narrow concentration of forecasts from all contributors,
an overall final average and consensus will be
distilled by the market. Unless the detail of the survey that led
to the final consensus number is looked at, traders have no way
of knowing whether the market is diverse in expectation or
highly concentrated. This is important in understanding the
potential price reaction to the data when they are released.
When the actual result diverges from the consensus expectation,
market price reaction will be dramatically different
depending on whether the consensus expectation was backed
by a concentrated narrow range of forecasts or by a widely dispersed one.
If the market is positioned over a wide range, unless the
result is completely outside the entire range (which does happen),
the whole market is not required to move toward what is
an unexpected reality. If, however, the entire market was narrowly
focused on a particular outcome and the actual result was
different even to a relatively small degree, the entire market has
to adjust to the unexpected reality. Obviously, the power of the
movement will be significantly greater when the consensus is
concentrated.
Read More: Research The Consensus
