Improve Your Trading with the Economic Calendar
Having a thorough understanding of using an economic calendar in your short-term trading strategy can enhance your performance when trading.
Events and Money – the Inexorable Connection
This brief article will guide you through the process of properly using an economic calendar to improve your trading performance when using short-term strategies. It will also help you understand how monitoring economic data can assist in better protecting your portfolio from high volatility.
The typical economic calendar contains a chronological list of upcoming economic data and statistics releases along with their import, forecast, and previous readings. Besides being a mainstay of fundamental analysis, the economic calendar can be used to significantly upgrade performance and the timing of positions, especially when news is published around significant technical levels.
The calendar can also warn traders about potentially volatile trading conditions that often surround the release of key economic data. This can help them greatly improve their risk and money management, and thus protect their trading capital.
Using an Economic Calendar can Help Traders Predict Market Volatility
Economic releases tend to exaggerate asset price movements, especially in the Forex market, and this can sometimes provoke wild swings in both directions.
This volatility often provides excellent opportunities for short-term traders looking to profit from such rapid movements. This is why many currency traders use the Forex economic calendar as a timing tool to help identify the best times to open and close positions.
Establishing medium or long-term positions based on data releases might require more FX analysis that can readily be performed immediately after the event occurs. For this reason, news trading is best suited for (very) short-term traders.
More conservative traders might wish to avoid such sharp swings by liquidating their existing positions altogether before the release of economic news, rather than risking a costly stop-loss order being triggered.
Important Economic Data to Follow
Monetary policy decisions made by major central banks, like the Fed in the U.S., the ECB in Europe, and the BoJ in Japan, make up the most influential pieces of information affecting the markets, especially the Forex one. This is especially true when it comes to central-bank interest rates and minimum reserve regimes, as they can impact the amount of money available in a given economy.
Monitoring releases that central banks follow and use to make their economic and financial projections can also be beneficial, as these often have great impact on their decisions.
Most central banks aim to maintain inflation at a certain level whilst providing a stable job market. News related to inflation and employment will, therefore, be particularly important, such as the Consumer Price Index (CPI), the Producer Price Index (PPI), wage evolution rates, unemployment rates, Non-Farm Payrolls (NFP), and growth-related figures like the Gross Domestic Product (GDP).
Nevertheless, major geopolitical events such as elections, issues of state solvency and the breakout of a war or virus can exert an even more dramatic influence on the market.
Less Significant Data can also Affect the Market
Minor events in the Forex economic calendar that slightly impact the exchange rate of currency pairs include Purchasing Managers Indexes, Consumer and Business Confidence indicators, and Housing and Construction market data.
Depending on the currency, some nations also release economic information that is unique to their countries. This can also affect their currencies’ respective exchange rates. An example of this is the Japanese Tankan reports that can affect the Nikkei and the JPY.
The Numbers Don’t Tell It All
After central bank rate decisions and other macro-economic events, one will often notice a substantial increase in an asset’s volatility. This can depend on the magnitude of the disparity observed between the actual number versus the consensus forecast.
If the actual reading is better than what analysts expected, the result is often positive for the market and can trigger upwards price movements. However, if readings do not match their forecasts, the markets can adversely weaken.
It is also important to compare the actual readings with previous ones, as this can also trigger price movements. Sometimes, a statistic can be worse than expected while showing an improvement from the previous month. This can be interpreted as positive by the markets.
Trading on News Releases
Timing your positions before, during or after a major release can be risky, but rather profitable. Anticipating what the market will do if the number is significantly higher or lower than analysts’ consensus is the most important element to consider before making a news-related trade.
Another major consideration that Forex traders should have in mind is the size of the move seen post-release, as this can also trigger good trading opportunities.
Does the resulting move justify the observed divergence in the data, or has the market taken things too far and possibly triggered a corrective movement? Discerning the direction and magnitude of the move and allowing for these factors to develop before taking a position is highly recommended for news traders.
After establishing a position in the wake of a major release, news traders will optimally place a stop-loss order and have a clear idea about where they expect to place a take-profit. They might even enter both orders with their broker as soon as possible to avoid a loss of discipline, although the risk of being whip-sawed during volatile trading conditions is considerable. Ultimately, it all comes down to the trading plan.
In short, this type of short-term news trading based around an economic data calendar generally seems most suitable for disciplined traders with a background in fundamental analysis and the ability to quickly analyse and react to new information as it is released.