Priced In Already - How does it work?

[Nowler]

Hey folks,
Forgive my ignorance but how does this work?

I just read an article about 2 possible rate hikes for the GBP in 2018, which the article says is already priced into the market.
Can we please discuss this sort of thing a bit, in the hopes that I can better understand it. I will say a few things and if I am mistaken or whatnot, i'd appreciate it if you could correct me or help me refine my understanding.

I have seen the phrase (already priced in) used a lot in the past and at first glance it makes sense...at least on a basic level. Correct me if I am wrong but using the 2 possible rate hikes with the GBP as an example, this is essentially investors/traders trying to get a headstart on predicted GBP growth?

Crudely speaking, if these 2 rate hikes are already priced in, then I have already missed that boat (in the sense of attempting to ride the growth as a result of said hikes), right? So would I be smart to be watching out for negative GBP data that will make some of those early investors to jump off the wagon? I mean... if the hikes make the GBP more attractive to investors and they have already priced it in...then the market has already made it's positive hike related growth? Therefore, the largest price movement potential from such a release is surely going to be to the negative side?

So say we fast-forward to the rate hike decision. How might I trade that if the hike has already been priced in? Surely going long before the news release is relatively pointless now if it has already been priced in?

 

[tomorton]

There are two news events here - one is the expected interest rate change. But the other, which has already passed, is the swing in market sentiment towards favouring a rate increase. News of this could have emerged from the BoE meeting minutes, or from the reported voting patterns of the BoE rate setting panel, from speech / interview remarks by the BoE Chairman, BoE analysis papers etc. Reaction to that sort of news can be very profitable because it is early.

But that doesn't necessarily mean there will be a negative reaction to the actual announcement when it comes. If people see the announcement and decide there is no further gain in GBP, then what are they buying when they sell GBP? There would have to be a reason to sell GBP but also a reason to buy some other currency. And maybe at that time these two factors will not be present, so the GBP can continue to rise.

But in both cases, surely the optimum policy would be to watch to see if price is rising after news and buy if it does rise and stay out if it doesn't? To buy something of which the price is not rising would be to buy something for which there is no collective market belief its value will rise. This would be pointless, surely?

 

[brewski1984]

How closely have you been watching the Dow the last few months? That scenario was pretty much being played out with the Tax Bill.

You also have to remember that when you buy gbp/xxx you're not just buying gbp strength.

 

[Nowler]

Does "priced in" mean that they have already entered their positions?
Perhaps I am misunderstanding the term...

 

[barjon]

Does "priced in" mean that they have already entered their positions?
Perhaps I am misunderstanding the term...

Priced in means that current price already reflects the expected impact of the upcoming news.

It’s why you often see companies announce good news only to see the share price drop on the announcement, either because the news wasn’t as good as expected (maybe worth a 5% rise in the share price rather than the 10% that the price had risen prior to the announcement) or because those who wanted the share were already in and there was not much demand left.

 

[mike.]

Does "priced in" mean that they have already entered their positions?
Perhaps I am misunderstanding the term...

Not necessarily entered their positions, but you are on the right track..The market has already moved due to the upcoming news and analysis related to that news.

Therefore there should be no surprise price spikes when the news or event is finally made public..i.e. The news has already been priced in to the market.

 

[Nowler]

Not necessarily entered their positions, but you are on the right track..The market has already moved due to the upcoming news and analysis related to that news.

Thanks for the input mate.
But how did the market move if they didn't enter their positions?

 

[Nowler]

Priced in means that current price already reflects the expected impact of the upcoming news.

It’s why you often see companies announce good news only to see the share price drop on the announcement, either because the news wasn’t as good as expected (maybe worth a 5% rise in the share price rather than the 10% that the price had risen prior to the announcement) or because those who wanted the share were already in and there was not much demand left.

Cheers mate.

I've seen that happen a few times actually.
I was pretty confused the first time it happened

 

[mike.]

Thanks for the input mate.
But how did the market move if they didn't enter their positions?

Well, if you are trying to off-load a couple of 1000 shares due to a rumour of bad news, you would keep lowering your price, lots of other people doing the same
would drive price down, supply is out-stripping demand.

 

[Nowler]

Well, if you are trying to off-load a couple of 1000 shares due to a rumour of bad news, you would keep lowering your price, lots of other people doing the same
would drive price down, supply is out-stripping demand.

Ok, thanks for the info my friend.
As you can likely see, my conceptual understanding is not on point yet but I'll work on it.

I was reading this thread a few mins ago http://www.trade2win.com/boards/fir... To Know When News Already Priced Into Market, which was somewhat helpful.

It raised the point that I should probably not be trading news so early in my trading career (stick to TA) and also largely because I dont have direct access to news releases. Still though, I feel I really should have a decent understanding of this stuff. After talking to 2 of the lads here I really ramped up my macro efforts

 

[Brumby]

I just read an article about 2 possible rate hikes for the GBP in 2018, which the article says is already priced into the market.

Can you please provide a link to that article that you referenced. Context and specfics are important. I am frankly skeptical without reading the conditional statements that usally accompanies such an opinion. Typically the ongoing pricing is expressed in terms of probability, not certainty because the dynamic variables are projections and cannot provide a certainty of outcome. Frankly I am skeptical of a 100 % priced in so far out on a probable event. It is just not typical of the market pricing mechanism.

 

[Nowler]

Can you please provide a link to that article that you referenced. Context and specfics are important. I am frankly skeptical without reading the conditional statments that usally accompanies such an opinion. Typically the ongoing pricing is expressed in terms of probability, not certainty because the dynamic variables are projections and cannot provide a certainty of outcome. Frankly I am skeptical of a 100 % priced in so far out on a probable event. It is just not typical of the market pricing mechanism.

Of course - https://www.dailyfx.com/forex/marke...rexit-Timetable-When-Trading-GBP-in-2018.html

I just want to point out though that I was only using the GBP context as an off-the-cuff example. I have no informed opinion of such GBP hikes personally. I was just catching up after my few days off and when I came across the phrase "already priced in", I remembered that I had a question on it

 

[Nowler]

... I am frankly skeptical without reading the conditional statments that usally accompanies such an opinion. Typically the ongoing pricing is expressed in terms of probability, not certainty because the dynamic variables are projections and cannot provide a certainty of outcome. Frankly I am skeptical of a 100 % priced in so far out on a probable event. It is just not typical of the market pricing mechanism.

This makes total sense.
I will be keeping an eye on this as it plays out.
Thanks for your insight. It's helpful, though I dont know enough to continue the discussion unfortunately.

I'll certainly listen if you want to continue though

 

[Brumby]

Of course - https://www.dailyfx.com/forex/marke...rexit-Timetable-When-Trading-GBP-in-2018.html

I just want to point out though that I was only using the GBP context as an off-the-cuff example. I have no informed opinion of such GBP hikes personally. I was just catching up after my few days off and when I came across the phrase "already priced in", I remembered that I had a question on it

Personally I would interpret what was said as an opinion because there is no reference source on "priced-in". Credible analyst provides a reference source because "sources" e.g. Fed market watch actually works out the probability based on some complex mathematical inputs.

 

[Brumby]

O
I just want to point out though that I was only using the GBP context as an off-the-cuff example.

Just to finish off on this conversation say when you are referring to a currency pair GBPUSD, it is not just about GBP prospective rate hikes but also USD prospective rate hikes. Prospective rate hikes affect bond yields e.g. on both US10Y and GB10Y which their yield spreads has a bearing on currency pair pricing. It is not some static but dynamic conversation involving many variables.

 

[timsk]

Forgive my ignorance but how does this work? . . .

Hi Nowler,
If you've not read it already, you might find this Sticky useful: Essentials Of Technical Analysis. If you don't want to read the whole thing, the section most relevant to this thread is entitled: 1. Market Action Discounts Everything.

Additionally, be sure to check out post #3: 'Other Resources on T2W & Beyond' - especially the very last entry under 'EXTERNAL LINKS' about EMH.
Tim.

 

[Nowler]

Personally I would interpret what was said as an opinion because there is no reference source on "priced-in". Credible analyst provides a reference source because "sources" e.g. Fed market watch actually works out the probability based on some complex mathematical inputs.

Indeed. Nothing more than an opinion.

Can you please provide me with a link to Fed market watch? I did a quick google but cannot see exactly which you are speaking of.
I was using Dailyfx to develop a routine of information accumulation but of course it makes total sense to be establishing this routine with as accurate and as credible of a source as possible. Note: I do read reports direct from central banks and whatnot. I just like to read Dailyfx to get a general understanding of where others stand.

Just to finish off on this conversation say when you are referring to a currency pair GBPUSD, it is not just about GBP prospective rate hikes but also USD prospective rate hikes. Prospective rate hikes affect bond yields e.g. on both US10Y and GB10Y which their yield spreads has a bearing on currency pair pricing. It is not some static but dynamic conversation involving many variables.

...You also have to remember that when you buy gbp/xxx you're not just buying gbp strength.

Yep.
I realise that it's not just buying/selling particular currency potential, but rather against another economy. I was just singling out potential of a particular currency. Of course good buying potential of 1 currency can be negated by more potential of another.

I just look at individual currencies and then find which I believe have buying potential and which have selling...
I then match them against their counterparts. Of course I would ideally be looking for a strong buying potential currency to pit against a strong selling potential.

 

[Nowler]

Hi Nowler,
If you've not read it already, you might find this Sticky useful: Essentials Of Technical Analysis. If you don't want to read the whole thing, the section most relevant to this thread is entitled: 1. Market Action Discounts Everything.

Additionally, be sure to check out post #3: 'Other Resources on T2W & Beyond' - especially the very last entry under 'EXTERNAL LINKS' about EMH.
Tim.

Cheers buddy!

I have read a bit of it but not all.
I have it bookmarked now and will read over it today.

 

[anon301501]

Basically big player's or banks already know the news outcomes so they buy or sell ahead of time and wait till it hits the headlines and when everyone does what's expected they off load their positions to them as a form of liquidity. OR they wait for the news to come out, let the market move to better level for them to reverse whatever is happening, if a lot of people jump in and push a market to that level, they use that against us because they'll get a better price and bigger portion of their trade on against the retail trader.

 

[piphoe]

"priced in" means to me already discounted, taken into consideration and price adjusted heretfor