Trading the Economic Calendar

An economic calendar is a schedule of economic events that will take place over the next day, week, month or quarter. Trading the economic calendar can be beneficial for some traders.
Trading the Economic Calendar

Most traders believe that the current exchange rate or the price of a security reflects all the currently available information. Prices move when new information becomes available. Of course, there is always noise that will whipsaw prices around a range, but for an exchange rate to move to a new range, new information must become 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 an Economic Calendar to trade around as the new information becomes available.

The Most Important Economic Events

An economic calendar is a schedule of economic events that will take place over the next day, week, month or quarter. An economic calendar will tell you what time a release will take place. In addition, many Forex media sites and brokers offer an economic calendar that includes an estimate that is generally the average of several analysts who are covering that economic release.

There are several very important economic indicators that are market moving events. For example, the employment report in the world’s largest economy (Non-Farm Payrolls), the United States, will consistently generate volatility. The Consumer Price Index (CPI) that measures inflation in the U.S., Europe, Japan and the rest of the developed country, provides insight into price changes and this can be a driver of interest rates and currency exchange rates. Growth is reflected in an economic release called the GDP (Growth Domestic Product). Monetary policy changes by central banks, including the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan, are key events that drive market volatility.

Trading the economic calendar or economic events applies also to commodities and other instruments. For example, if you trade crude or brent oil, you must be attentive to the EIA weekly petroleum report published on Wednesday. Also, The USDA grains report is published once a month and generate high volatility if you trade any of the grains/softs 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 the outlier than the norm. Analysts from around the globe report their forecasts, which are reflected in an average, with highs and lows by analysts noted. If the actual release is unexpected, the markets will change to reflect the new information. Additionally, market changes after new information can be sharp and nasty. If you monitor these whipsaws in the securities or currency pairs you are trading, you will see that many times these events generate a breakout in the direction of the trend.

Trading the Economic Calendar

Since volatility will follow in the wake of an economic release, you will have an opportunity to take advantage of this situation. Economic releases are generally released like clockwork at a regularly scheduled time during a month. Most releases that are of significance come out once a month and generally reflect the economic situation during the prior month. For example, the May unemployment report in the United States will be released at the beginning of June. There are several economic releases that come out weekly including unemployment jobless claims and the Department of Energy’s inventory report. As a trader, once you find your broker and platform to trade with, you must follow the economic calendar on a daily basis.

How to Trade Economic Events

You can employ 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. Additionally, you need to provide yourself with robust risk management. Trading around the numbers can be very risky if you take a position before an important event. If you decide to initiate a position before a market moving event, understand that you need to incorporate illiquid market conditions into your risk management process. Stop losses when markets are illiquid can generate huge slippage. One way to measure this risk is to evaluate the changes in the price of the exchange rate you plan on trading following specific economic releases. If you find for example that the average range of the EUR/USD in the hour following the Non-farm payroll report is 50 pips, you should understand that your stop loss could be at least 50-pips.

A more conservative approach to trading the numbers is to wait for the results and then formulate a view within 30-minutes of the release. As traders begin to jockey for position, you can avoid the initial whipsaw price action as an exchange rate finds a range. Many times, an exchange rate will break in one direction and then consolidate before it continues to trend. Other times the initial move is a fake out. You can combine some technical analysis into your trading to determine a market has positive or negative momentum.

There are hundreds of products you can trade to take advantage of the new information. By trading currencies as well as Contracts for Differences (CFD), you can take a view of most financial instruments. A CFD allows you to trade indices, commodities, cryptocurrencies, and shares. Companies like HQBroker, provide a state of the art CFD trading platform that will allow traders to take a view on a financial instrument while watching economic releases in real-time.

Summary

The capital markets are efficient markets, and most investors believe that all the currently available information is incorporated into the price of a security or exchange rate. Prices generally begin to move when new information is available such as economic data, or a change in monetary policy. Market noise will generate 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.

Additionally, you will be able to find the average analyst forecast which is measured against the actual release. Once this becomes available an exchange rate will begin to move if the forecast is different from the actual release. Obviously, there are degrees of surprise, but if the market is caught offsides it will experience volatility.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US