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What is an Economic Calendar and How to Use it for Trading?
According to most traders, the price of a security or the current exchange rate reflects all the information that’s available currently. When new information becomes available, the prices tend to move. Yes, it is true that prices will constantly move around a range when there is noise, but the exchange rate can only move to a new range when some new information comes to the surface.
While it is true that this new information can come up at any time, you should know that there is also some important information that’s scheduled. This includes decisions regarding the monetary policy and also economic data. As this information is scheduled, an economic calendar can be used by traders for conducting their trades as this new information comes to the surface.
What is an economic calendar?
In simple terms, an economic calendar refers to a schedule of economic events that are set to happen over the next day, week, month or even quarter. The purpose of the calendar is to inform traders of when a release will happen. Apart from that, a number of brokers and websites provide an economic calendar to traders that also includes an estimate of the average of numerous analysis covering the economic release.
There are a wide array of important economic indicators that can cause movements in the market. For instance, the Consumer Price Index (CPI), which measures inflation in Europe, the United States, Japan and other developed countries can give an insight into the price changes to be expected thereby having an impact on currency exchange rates and interest rates. As far as growth is concerned, it is reflected through an economic release known as the GDP (Gross Domestic Product). Other key events that can lead to volatility in the market include the changes in monetary policy by central banks, which are the Bank of England, the European Central Bank, the Federal Reserve and the Bank of Japan.
Moreover, it should be noted that trading the economic events or economic calendar is also applicable to commodities and other trading instruments. For instance, if you trade brent or crude oil, you have to pay attention to the EIA weekly petroleum report that’s published every week on Wednesday. Likewise, once a month, the USDA grains report is published and it can lead to a great deal of volatility if you are trading any of the soft commodities or grains, such as wheat, corn, soybeans, cotton, coffee and more.
You can rest assured that there will be some volatility if an economic release takes the market by surprise. This does happen, but it is not considered the norm. Analysts from all over the world are known to report their forecasts, which are stated on average, and the highs and lows are also mentioned by the analysts. If the actual release comes off as unexpected, it is a given that the new information will be reflected in the market through change. Furthermore, the changes in the market that occur after the release of new information can be rather nasty and sharp. If you are constantly monitoring these whipsaws in the currency pairs or securities you are trading, you will notice that in most cases they lead to a breakout in the direction of the trend.
As volatility is expected after an economic release, it gives traders the opportunity of taking advantage of a situation. These economic news are generally released like clockwork at a specific time in a month. Most of the news and events that are significant are usually released once every month and they reflect the economic situation of the month before. For instance, the unemployment report in the United States for the month of May will be released in the beginning of June.
Other than that, there are also some economic releases that are made on a weekly basis, such as the inventory report of the Department of Energy or the unemployment jobless claims. Once traders have selected their broker and the platform they wish to trade with, it is essential to make use of the economic calendar on a daily basis.
How to Use the Economic calendar for trading?
Several strategies can be employed for reaping the benefits of economic releases. A purely technical strategy can be used by traders or they can also combine a technical strategy with their own opinion of what has happened. Furthermore, you have to ensure that you are using the best risk management strategies during trading to keep your losses at a minimum. It should be noted that it can be very risky to trade around the numbers if you are taking a position before an important event.
In the case that you decide to take up a positive before a market moving event occurs, you should note that illiquid market conditions will have to be incorporated into your risk management process. When the market is illiquid, stop losses are known to generate a lot of slippage. One way of measuring this risk is by evaluating the changes in price of an exchange rate you want to trade after the release of specific economic news.
A more conservative approach to trading would be to wait for the results of an economic release before you formulate a strategy. This can be done within half an hour of the release. A lot of traders will start jockeying for position and you can avoid the initial fluctuation in price until the exchange finds a proper range. Sometimes, an exchange rate breaks in one direction before consolidating and becoming a new trend. In other cases, the initial move turns out to be a fake out. Technical analysis can be used in trading for determining whether there is positive or negative momentum in the market.
Thanks to technological advancements, economic calendars are now available to traders, no matter what instruments they decide to trade. Whether you are trading futures, stocks, forex, options or other instruments, you can easily find an economic calendar to help you in making smart trading decisions.
Market News You Can Actually Use
Our economic calendar covers important financial events from all over the world. It’s updated automatically and provides you with key indicators, rated by importance. Market events include Employment Situation Reports, Non-Farm Payroll, Inflation Rates, etc. For more info on how to use our economic calendar, please contact us.
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