When it comes to trading, it is vital to consider every kind of information you can get your hands on to have the most accurate representation of what is happening in the stock market. This can be done by following the listed companies in your portfolio and manually finding news and information about them.
However, if your portfolio is massive and consists of multiple entities, this can be a tiresome job. You might set Google alerts for general information, but following every company in detail is not an easy task and requires a far more organized approach.
Let’s face facts; the $6.6 billion-per-day forex market is one of the most volatile entities of its type anywhere in the world. This is why traders need to make the most of every resource and tool they have at their disposal, including the much-vaunted economic calendar.
The economic calendar can be a trader’s best friend during the rough and tumble of forex market activity and price movements, particularly those who operate as day-traders and strive to capitalize on the innate volatility and inflated leverage of the foreign exchange.
But how do you define the economic calendar, and what steps can you take to decrypt its data and use this to your advantage?
Defining the Economic Calendar (and its Top-level Data) for Traders
In simple terms, an economic calendar showcases the scheduled news events and key data releases related to individual economies and financial markets.
From details of the Bank of England monetary policy meetings (where the UK’s base interest rate is set) to the latest GDP growth rates and non-farm payroll numbers in the US, these datasets are incredibly diverse and can impact markets across the board. In this respect, the economic calendar is surprisingly packed, with data releases featured at least once a week on average but often published daily across the globe.
When reviewing individual entries to the economic calendar, you will see that each specific event and data release is graded. These will vary from one calendar iteration to another, although minor events (which are expected to have a minimal market impact) are usually marked as ‘low’. You’ll also see events marked as having a ‘medium impact’, with these typically highlighted using a yellow dot or star beside them.
Red stars or dots highlight high-impact events and data releases. Understanding these categorizations is crucial if you want to gauge the importance of entries and tailor your strategy accordingly.
As we have mentioned before, there are various events that have a high impact on the market and move it on a monthly basis. These are:
- US Non-farm payrolls (NFP)
- Central Bank rate decisions
- Consumer Price Index (CPI) or Inflation
- Retail Sales
- Produce Price Index (PPI)
- Gross Domestic Product (GDP)
- New Home Sales
- Durable Goods Orders
- Existing-Home Sales
- ISM Data
- Trade Balance
These events are responsible for shaking the market and causing volatility. The Non-farm payroll data is perhaps the biggest force of all, released on the first Friday of every month.
The high-volatile nature of the market is enjoyable for intraday traders. Nothing excites them more than if the markets are not moving. Data releases are the driving force for intraday traders. Perhaps the most common way to trade big data release is to use breakout levels.
Breakout levels also indicate the direction in which the market is going to trend. A breakout refers to when an asset’s price moves above a resistance level or below a support level. When occurred on a high volume (compared to normal volume), these typically indicate greater conviction chances and mean that the price is also likely to trend in that direction.
For technical traders, chart patterns like ascending triangles, descending triangles, pennants, double tops, triple tops, double bottoms, triple bottoms, and more are super useful to classify the type of market you want to trade-in. This makes it easier to scope out key levels, draw breakout levels (if possible), and use the economic calendar to note the expectations and predictions for upcoming releases.
It is always important to remember that trading around press releases and data releases can result in significant volatility, and you might lose more than what you invested initially.
How Else Can You Decipher Economic Calendar Information?
Beyond this, you will also note that most economic calendars provide a short description of each listed event and a distinguishing value for the actual, factual, and previous information available. The forecasted number will typically be expressed as either a percentage or a currency value. This represents the market impact and whether or not this is considered positive or negative.
Make no mistake; this number has a seminal impact on trading sentiment and the behavior working up to a high-profile news event. It’s something that helps you forecast the trajectory of the market and key assets.
The ‘previous’ marker refers to the change recorded in a specific asset or market after the most recent relevant economic calendar event, creating an opportunity to track historical price movements and make more informed decisions.
Conversely, the ‘actual’ value tracks the objective price movement immediately following the event, and this is an important metric for day-traders who typically open a high volume of short-term positions.
When you consider these values in unison (along with any background information that’s provided about a particular event), you should be able to implement and adapt your trading strategies while minimizing risk and forecasting short-term market price movements.
How Economic Calendar Reduces Risks While Trading
Perhaps the most important use of economic calendars is to minimize the risk while trading. One cannot say that using an economic calendar makes it a risk-free trading experience. In fact, you should know what you risk on every single trade.
This risk can be defined as the difference between the entry price and the stop-loss price multiplied by the size of the position. The value should be less than 2% of the total equity you own and should ideally fall under 1% for better results.
Risks are also caused by the release of high impact data or press releases. These are the events that are marked as red and are very volatile. Irrespective of whether the press release is in line with market expectations, volatility around the event is very typical and is naturally expected.
Since one cannot exactly know how much data will be revealed about the number of orders that come into the market or its release in a reduced liquidity environment, most professional traders close out their forex, stocks, or future positions within 5 minutes before the high-impact data is released.
Many other brokers also avoid buying new stocks until after the data has been released. This is a good practice since the market is usually very volatile and can go either way once the numbers are made official.
Traders also might “sit out” while the events causing market volatility is happening by canceling their pending orders. These canceled orders might result in a drop in liquidity right before the so-called volatile event occurs. As a result, there are fewer orders to cater to the market that are triggered by the event. This eventually cancels out the volatile nature of the market and might make it stable earlier than expected.
Despite all the statistical trade analysis or early predictions, the market does not always follow press or data releases’ logic. Experienced traders and market participants anticipate an announcement in advance that might either result in swift aftermath of a known volatile market or wild, if inconsistent with previous expectations.
The takeaway from this is the importance of economic calendars and getting used to using them every time you trade so that your strategy is improved gradually and you will understand how not all announcements result in a total shakedown, and also how little news can move the market completely.