How Markets Work · Intermediate · 5 min

How prices react to news

You can explain why prices react to the surprise in news rather than the news itself, and plan around scheduled releases.

Good news, falling price

A company reports record profits, and its share falls 5%. A month later it reports a loss, and the share rises. At first this looks like the market has lost its mind.

It hasn't. Markets do not react to whether news is good or bad. They react to whether it is better or worse than expected. Once you see news that way, many confusing moves start to make sense, and you can plan for the moments when prices are most likely to jump.

Expectation versus surprise

Before any important release, buyers and sellers have already formed an opinion about what it will say. Analysts publish forecasts, and traders position themselves accordingly. The price at that moment already reflects this expectation. When an outcome is widely expected, traders say it is priced in.

When the news is published, the market compares it to that expectation:

Better than expected: the price tends to rise, even if the news itself sounds bad.
Worse than expected: the price tends to fall, even if the news sounds good.
As expected: often little happens, because the price already contained it.

The size of the move depends on the size of the surprise and on how many traders were positioned the wrong way.

News comes in two kinds. Scheduled news is known in advance: central bank decisions, data such as inflation or jobs figures, and company results. The US Federal Reserve, for example, publishes its meeting dates long ahead, and the US jobs report has a fixed release time. Traders collect these dates in an economic calendar. Unscheduled news arrives without warning: accidents, lawsuits, a sudden resignation.

Around both kinds, the mechanics from the last lessons apply. Market makers widen their quotes, the book thins out, and prices can jump in seconds. Orders can slip, and stops can fill far from their price.

Better than last year, worse than hoped

A fictional company trades calmly around 80 before its results. Analysts expect a profit rise of 20%.

The company reports a rise of 10%. In the first minutes, some traders read only the headline and buy: the price jumps to 81.60. Then the details spread, the result is clearly below forecasts, and the selling starts. The price drops to 77.90 and closes at 78.40.

The news candle shows both moves in a single bar, with long wicks on each side. Anyone who bought the first jump, or had a stop just below 80, felt the full swing.

Common mistakes

Judging news as good or bad. What matters is the gap between the result and the expectation.
Trading the first move. The first reaction after a release often reverses within minutes.
Forgetting the calendar. Most big moves happen around releases you could have known about in advance.
Expecting normal spreads. Around news, spreads widen and fills get worse, as covered in the lessons on spreads and slippage.
Treating the forecast as a fact. Expectations differ between sources, and the market's real expectation is never published. Treat any forecast as a rough guide.

The takeaway

Markets trade the surprise, not the headline. Expected news is often priced in, and scheduled releases are known in advance, so check the calendar.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the candle in which the results were released.

Tap the chart.

The long candle with long wicks on both sides is typical of a news release: a fast jump one way, then the other.
2A company reports profits 10% higher than last year. Analysts expected 20%. What often happens?

Prices already reflect what most people expected. The reaction depends on the gap between expectation and result.
3What does "priced in" mean?

If everyone expects something, buyers and sellers have already traded on it. Only the surprise moves the price.
4Which of these is scheduled and can be checked in advance?

Central bank meetings, economic data and most company results are published in calendars well in advance.

of 4 correct.