A Guide For Using the Economic Calendar

Martin R
Category:  Trading Courses

Introduction

 
Trading should always be the result of a due-diligence process: technical and fundamental factors influence the decision to buy or sell a currency pair. Technical analysis deals with the ability to use pattern recognition and technical indicators to spot future price levels, while fundamental analysis deals with economic news interpretation.
One without the other is not enough for consistent profits to be made. However, not all traders buy or sell based on both. 
The Forex market is a place where over $5 trillion dollars are traded every day. Market participants range from commercial to central banks, from retail traders to Forex brokers, liquidity providers, and so on.
Everyone has a different reason and scope when exchanging a currency: some are speculators, others are market makers or intermediaries, etc. For most of these entities, technical or fundamental analysis don’t really matter.
It is not the same for retail traders. If technical analysis is visible and expert advisors (trading robots, trading algorithms) can be built based on a technical setup, it is not the same when it comes to fundamental analysis.
At the core of fundamental analysis is the economic calendar. This is a public and free tool that must be used before opening a position.
This guide is designed to make everyone understand what the economic calendar is and how retail traders can use it to their advantage. It is not mandatory for one to be an economist to understand the calendar: it is mandatory to have the will to understand why prices will move when an important economic release is due.
 
 
Chapter 1 – What is the Economic Calendar?
The economic calendar is made up of the economic news that is about to be released in the period ahead. The news is grouped in different categories, from the most important one to the less relevant one, based on the expected market impact.
Not just economic news forms part of the calendar. Geopolitical events, referendums, elections…they all make up the calendar.
The calendar is free for anyone to consult and use. Forex brokers offer this information, and a simple Internet search leads to many websites where it can be found.
Economic news has a purpose: to show us how an economy is performing. Traders use this information to a position on the right market direction.
After all, trading is all about comparing the two currencies that make a currency pair. If the economic news in one country/region points to a weaker economy ahead, this will be seen in the way the currency is moving too.
This economic news repeats on a constant basis. The same piece of economic data is followed by traders every month, quarter, year, with the idea being to have an educated guess about what the central bank will do next time it meets.
A classic view of the information that makes an economic calendar is seen below:


From left to right, it all starts with the date. Traders typically use a weekly horizon for the economic calendar.
The next column shows the release time for the news. Make sure you understand that, unless specified as tentative, the economic news comes exactly at that time. By the second.
This is not by chance. Humans follow robots these days when it comes to Forex trading. Supercomputers use complex trading algorithms to buy or sell thousands of positions per second.
No human can do that, and because of that, there is a strong competition that takes place between different trading entities. The one that executes more trades in the shortest time is the winner.
Ever wondered why the Forex market makes an aggressive move at the very second an important piece of economic news is released? The answer comes from the algorithmic trading, from all these robots that buy or sell based on what the news shows.
 
 
Chapter 2 – Economic News Categories
The economic news is grouped into three categories: very important (the one that makes markets moving aggressively, with big figures travelled in a blink of an eye), medium-impact news (the market may or may not move when this news is released) and low-impact news (the Forex dashboard is not influenced by this news).
If the economic news is better than the expected outcome, this is generally positive for the currency, and buyers will step in. If not, if it disappoints, sellers will take control.
The bigger the importance of the news, the bigger the market impact will be. The bigger the difference between the actual release and the forecasted one, the bigger the market impact.
A color code shows the importance of the news:
  • Red = very important news ahead. Beware of the high-impact of this news. This is what matters the most for both central bankers when an economy, as well as for traders when trying to guess what the central bankers will do with the monetary policy next time they meet. Examples of such news jobs data, PMI’s (Purchasing Managers Index), Retail Sales, inflation, etc.
  • Orange = medium-impact news expected. Markets may or may not react to it, and all eyes are on the actual number expected. If it is way different than the forecasted one, the currency will move, but this is always a second-tier data. Rarely the market moves on it, and if it does, it is the result of positioning for the next red event. Durable goods, flash PMI’s in Eurozone, etc., represent economic news that fit into this category.
  • Yellow = low-impact news expected. Little or no market reaction expected when this news comes out. Even if the actual differs from the forecasted number, traders don’t place much of an emphasis on it.
An economic news description appears if one is clicking on the icon on the vertical Details columns. This follows the title of the news on the image presented above.
Below is the Unemployment Claims release in the United States. Clicking the Details tab, a window appears with everything there is to know about the release: what are measures, the usual effect on the market, release frequency, why it is important for Forex traders, and so on. Historical evolution is present as well, making it possible to make charts and to spot possible trends in the economic data.


Traders rarely focus on other news than the red one: this matters the most for them as the central banks base their economic assessment and future monetary policy on changes related to this news.
 

 
Chapter 3 – What Economic News to Follow?
The red news is the only one that matter for both the Forex traders as well as central bankers. Central bankers use that information to set the monetary policy for the period to come, while retail traders use it to have an idea about what the central bank is going to do next time it will rule over the monetary policy.
Inflation is on top of the list. In economic terms, inflation means Consumer Price Index or CPI.
Monthly or yearly, inflation shows the changes in price for goods and services in an economy. There is a direct relationship between inflation and interest rates: higher inflation is met with higher interest rates, while lower inflation brings an easy monetary policy.
When an economy grows, a certain inflationary level is normal. 2% is the target for most of the capitalistic economies and it is part of their central banks’ mandate.
Values like 1.9% or 2.2% are in line with normal growth, without imbalances. Anything above, and the economy is overheating, the inflation is spiraling and prices move in a dangerous area.
Anything below 1.8% and the economy is gripped, generations are lost as deflation risk is growing. As a side note, deflation happens when inflation falls below zero.
As we all learned from Japan by now, deflation is difficult to fight. More than two decades it crippled the Japanese economy. Wounds are still visible.
Jobs data follows. The unemployment rate, labor participation rate, non-farm payrolls, unemployment claims, claimant count, continuing claims…all these represent jobs data variations in different countries and is either red or orange.
Nevertheless, the overall information is important, especially in the United States. The Federal Reserve of the United States, the central bank, is having a dual mandate. Besides inflation, it considers jobs data to.
PMI’s or Purchasing Managers Index is next in line. This is a survey that shows an expanding or a contracting sector. When a sector is expanding, the PMI release is bigger than 50.
Contractions show the PMI below 50. In the United States, the PMI is called ISM and the acronym comes from the Institute for Supply Management.
Other economic data should be watched too. Retail Sales, GDP (Gross Domestic Product = the total value of the goods and services that make an economy), Durable Goods Orders, etc., are all part of the overall economic picture.

Chapter 4 – Other Market-Moving Events
Other economic events are part of the economic calendar too, even though they are not economic news per se. The following bring tremendous volatility and traders look to position ahead of them:
  • Press conferences. The Federal Reserve in the United States was the first central bank to introduce the forward guidance principle a few years ago. Since then, many other major central banks followed. Nowadays, press conferences are the norm in Europe, Australia, United States, and so on. High volatility surrounds these events, with ranges dominating ahead of them.
  • . The Chairman/Chairwoman of the Fed in the United States must testify in front of the Senate and the Economic Committee two times a year: in the spring and the fall. This semi-annual testimony is closely watched as the Fed is giving clues regarding the next moves in the monetary policy. The same is valid in Europe, with the ECB (European Central Bank)’s President regularly testifying ahead of the European Parliament. Market participants closely watch the volatility in the respective currency pairs.
  • . Economic summits like the Jackson Hole in the United States (world’s bankers meet to discuss central banking’s evolution), the World Economic Forum in Davos, Switzerland (world leaders meet to discuss world’s economic challenges), G20 and G7 meetings, European Union Summits, etc. These reunions end up with market increasing in volatility because financial media representatives release interviews and opinions that create volatility.
  • Central Banker’s Speeches. Speeches are scheduled in between monetary policy meetings. They reinforce market participants the central bank’s view on the economy and the course of the monetary policy. Seldom market is surprised by these speeches.

 
Conclusion
To sum up, the economic calendar and the information it contains are part of the day-to-day market analysis. There is no way around it.
One doesn’t have to be an economist to understand these economic releases. What matters is to be able to make a distinction between the news that matter for the central bank (hence, for the Forex market, as this is the news that creates volatility) and the news that should be discounted.
Not all economic news is important. The news that matter is important. Beginner traders may find it a bit difficult to follow this monthly and yearly routine into news following, but after a while, they’ll find out that things repeat on and on.
Price action around important economic events is enough to end up the right side of the market. For this, the fundamental analysis is as important as the technical one.
 
 
 
 
 
 
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