Trading Quantitative & Qualitative Events
Just quickly following up with a very good question here from a subscriber asking when we can know when certain data points or central bank statements or unscheduled news events, how we can know whether they are better or worse than expected?
So to answer this, we can draw a line between two different types of data points or events, namely quantitative data and qualitative information. So something like quantitative info is things like actual measurable data.
Things like actual economic indicators, like today we had durable goods and GDP second estimate and initial jobless claims, these are all actual data and we can quantify whether the data is better or worse than prior by just looking at the actual numbers. So when it comes to qualitative info, that’s the more tricky part, and that takes some getting used to because these are things that are not really measurable like actual data points.
They are things like, nuances in trading, whether a central banker has said something hawkish or dovish, whether a central bank’s statement is more hawkish or more dovish than expected, whether political comments are seen as a positive or negative for the country and thus the currency, those things are more nuanced. Now, also think of things like trade comments, right, between the US and let’s say Europe.
Let’s say President Trump comes out today and says that he’s going to put tariffs on European cars coming into the US. Now there’s no quantifiable way of knowing off the cuff what the actual implications will be in terms of actual GDP and actual trade between the two countries.
But the qualitative side of trading tells us that due to Germany being the biggest contributor to overall EU GDP, and knowing that it is a big part of the German economy is automobiles, knowing that, that’ll tell us that quantitatively, that news is going to be negative for the Euro and possibly negative for something like the German DAX 30 and the EURO STOXX 50 as well. So having said that, the question is how can we better know when those type of news will be negative for the market?
Well, two things really. It comes down to expectations once again, but also the overall market knowledge that you have is a major important point to keep in mind as well. So thinking of expectations first, right?
It’s easier to, to some extent, to plan ahead for quantitative factors and data like economic indicators because we know exactly when the data will occur, and we know exactly what the prior number was, and we know what the consensus is for that particular event. So we can, just by looking at the numbers we can know, okay, this thing is better or worse than expected.
But just knowing that alone won’t help us. We need to know what the expectations was for that event before the data is released. And basically, knowing how that type of data point, how it changes the market’s expectations for the broader scheme for that economy.
Is it a major data point right now or is it just something, it’s just another CPI event or another GDP, or is it really a very important one that we need to watch? So always looking at the expectations. When looking at qualitative analysis, it might be more nuanced because you’re trying to evaluate how the market might feel about something, how it might feel about the central banks, how it might feel about tariffs on a country, et cetera.
It’s more subjective but it will be also driven by expectations, which is the key point to remember. So a central bank’s statement will only be market-moving if it’s much more dovish than the markets were expecting, or if the markets were expecting a hawkish statement and it comes out dovish.
Now to some extent we can also trade these type of events with more confidence as well because we can know ahead of time what the expectations are for that particular central bank, because we know when it’s gonna come out, we know what the markets are expecting, we can do our research before the actual event comes out.
Now the more trickier one is the unexpected and the unscheduled news events. Think of an announcement like tariffs or unscheduled comments from central bankers. Now, this might require some additional research on your part as a trader.
For example, make some time to study some of the important economic factors that might influence the major economies.
So this will be things like knowing what the major trading partners are for the major economies and knowing what each major economy’s biggest export is and what part of their economy is the biggest contributor to their GDP.
So think of things like iron ore and coal for Australia and oil prices for Canada and automobiles for Germany or the services industry for the UK. All of those type of things will help you do better trade the more qualitative news items when it hits the wires. And for unexpected central bank comments, it’s also gonna take some additional research.
So ahead of time you can know what these market expectations are for a particular central banker. So if it’s a dove or a hawk, you can know ahead of time, okay, if this guy comes out and says something hawkish or dovish, I’ll know that that goes against what the market is currently expecting from that person.
Or if a central bank is currently expected to cut rates, if a central banker comes out that is normally more dovish, so you would expect them to say something in lines of cuts. If he comes out and says that, okay, I’m thinking we should rather stay on hold, of course that’ll be a major positive for the currency.
So those type of things, it’ll take some additional research, it’ll take some additional time, but obviously well worth knowing those things ahead of time as it’ll put you way ahead of the curve for most of the retail traders out there.
So either way, understanding the differences between the quantitative and the qualitative side will help you to better prepare for these events, but also looking at the expectations is important and making sure that your overall market knowledge is also up to date with what type of news might be important for the major economies.