HOW TO TRADE THE ECONOMIC CALENDAR
“The economic calendar is a schedule of economic events that will take place in the next day, week, month or quarter. Trading the economic calendar can be beneficial for some traders.”
Most traders believe that the current exchange rate or security price reflects all currently available information. Prices move as new information becomes available. Of course, there is always noise that will make the price move around the range, but for the exchange rate to move into a new range, new information must be available.
New information can come at any time, but some of the most important information is scheduled. This includes economic data, as well as monetary policy decisions. Since the information is scheduled, you can use the Economic Calendar to trade as new information becomes available.
MOST IMPORTANT ECONOMIC EVENTS
An economic calendar is a schedule of economic events that will take place on the next day, week, month or quarter. The economic calendar will tell you when the release date will be. In addition, many media sites and Forex brokers offer economic calendars that include forecasts that are generally the average of several analysts covering that economic release.
There are several very important economic indicators namely market movement events. For example, employment reports in the world’s largest economy (Non-Farm Payrolls), the United States, will consistently produce volatility. The Consumer Price Index (CPI), which measures inflation in the US, Europe, Japan and other developed countries, provides insight into price changes and can be a driver of interest rates and currency exchange rates. Growth is reflected in the economic release called GDP (Growth Domestic Product). Changes in monetary policy by central banks, including the Federal Reserve, European Central Bank, Bank of England and Bank of Japan, are key events that drive market volatility.
Trading the economic calendar or economic events also applies to commodities and other instruments. For example, if you are trading crude or brent, you should pay attention to the EIA’s weekly oil report published on Wednesday. Also, the USDA grain report is published once a month and generates high volatility if you trade grain/soft commodities (corn, wheat, soybeans, coffee, cotton, etc).
If the market is surprised by an economic release, you can bet there will be volatility. This happens but is more outlier than the norm. Analysts from around the world report their forecasts, which are reflected on average, with analysts’ ups and downs. If the actual release is unexpected, the market will change to reflect the new information. In addition, market changes following new information can be sharp and unpleasant. If you monitor this handsaw in the securities or currency pairs you are trading, you will notice that many times these events result in trend breakouts.
ECONOMIC CALENDAR TRADING
Since volatility will occur after the economic release, you will have the opportunity to take advantage of this situation. Economic releases are generally released like clockwork at regularly scheduled times during the month. Most of the important releases come out once a month and generally reflect the economic situation during the previous month. For example, the May unemployment report in the United States will be released in early June. There are several economic releases coming out every week including jobless jobless claims and the Department of Energy’s inventory report. As a trader, once you find your broker and platform to trade on, you must follow the economic calendar every day.
HOW TO EXCHANGE ECONOMIC EVENTS
You can use several strategies to take advantage of economic releases. You can use a purely technical strategy, or you can combine a technical strategy with your view of what has happened. In addition, you need to provide yourself with strong risk management. Trading around numbers can be very risky if you take a position before a significant event. If you decide to start a position before a market move event, understand that you need to incorporate illiquid market conditions into your risk management process. Stop losses when the market is illiquid can result in large slippages. One way to measure this risk is to evaluate the price change of the exchange rate you plan to trade after a specific economic release.
A more conservative approach to trading numbers is to wait for the result and then formulate a view within 30 minutes of the release. When traders start jockeying for positions, you can avoid early hand saw price action when the exchange rate finds a range. Often times, the exchange rate will break out in one direction and then consolidate before continuing to trend. Other times the initial move is fake. You can incorporate some technical analysis into your trading to determine whether the market has positive or negative momentum.
There are hundreds of products you can trade to take advantage of new information. By trading currencies as well as Contracts for Differences (CFDs), you can view most financial instruments. CFDs allow you to trade indices, commodities, cryptocurrencies and stocks. Companies such as HQBroker, provide state-of-the-art CFD trading platforms that will allow traders to view financial instruments while watching real-time economic releases.
The capital market is an efficient market, and most investors believe that all currently available information is incorporated into a security’s price or exchange rate. Prices generally start to move when new information becomes available such as economic data, or changes in monetary policy. Market noise will result in minor fluctuations in prices and add to volatility. You can track changes in economic releases by using a financial calendar where the time and date of most economic releases will be posted.
In addition, you will be able to find the average analyst forecast measured against the actual release. Once this is available, the exchange rate will start moving if the forecast differs from the actual release. Obviously, there is a level of surprise, but if the market is stuck outside it will experience volatility.