Economic Calendar Tutorial
Every trader wants to know what direction will follow. However, to get the most real answer to this, it is necessary not only to oversee the chart on the trading platform but also to constantly monitor what is happening globally in fundamentals, so you must use economic calendar when day trading.
What is an economic calendar? First of all, you need to know that the economic calendar is the diary of all announcements that are coming out related to the economy. The calendar can be used for different countries or different kind of regions like EU, US and the economic announcements will be things like inflation interest rates jobs numbers, factory orders CPI, PPI, all these kinds of things that can give us a gauge on the economy.
The economic news brings your attention even closer to reality, apart from technical and these numbers have potential to move the markets that you are trading, so there is a hidden risk.
Reasons for using the Economic Calendar:
1. Hidden risks.
Imagine you are a day trader holding a position and you are not looking on the calendar, and big figures coming out, potentially move the markets and might cause a spike on either direction you are just giving up complete control of risk. This also could affect Swing Traders however may lead to lower losses due to pre-determined risk plan. Eventually you can holdover dates if you have done your analysis.
Pattern of trading changes dramatically when we have big data coming out, so for example you have got NFP (US jobs numbers) coming out, or you have got a big interest rate announcement, more likelihood is the very correlated market to that. So, if we are talking about the currency of the country, or bonds of the country or the index of the country, anything related to the country will move, but if it’s a big number that everyone’s expecting, the pattern of the trade will change and you may see a choppy trading because no one may want to put their money up front, as a result you may end up gambling. Knowing the pattern and the way the market is trading will alter when we you have big upcoming news.
You can build your trading strategy before the news, while the news coming out or you can wait little longer after news come out to rest assured the that you will follow the correct direction and avoid any possible manipulation that will cause spikes.
3. Combination of a lot of different data which have inverse correlation (the value of one variable is high then the value of the other variable is probably low):
Negative Correlations: For example, when bond yields are low and investors expect to earn very small amount, means stocks and other investments become more attractive. As a result, when inflation expectations increase, bonds are less desirable, and their prices are more likely to fall. Another example is gold against USD and gold against stock market. USD depreciation will lead to higher gold price, because will be cheaper for investors who holds foreign exchange currencies to buy it. Oil against dollar inverse correlation also exists because, when the U.S. dollar is weak, the price of oil is higher in dollar terms.
Positive Correlations: EUR/USD and GBP/USD. If EUR/USD is trading up, then GBP/USD will also move in the same direction.
From Economic Calendar you can see the importance of the upcoming news and how big will be the market impact. You can compare previous rates against forecasted and current ones for each type of event. You can choose timeframe and or time zone and apply any filters of your preference.
Trading needs discipline, consistency, and persistency, along always with a proper risk management to meet your targets.
As a result, the economic calendar becomes your friend and assist you taking informative decisions. It also assists you in a way to be ready in advance and set up your strategy for upcoming news from countries outside your time zone. Economic calendar can provide you historical numbers for each type of event along with forecast and actual numbers to evaluate further your risk tolerance.
Usefulness of Economic Calendar:
- Provision of pre-existing historical data assisting you taking better trading decisions and setting up your risk.
- Adding alerts for upcoming news and be ready to get in the market.
- You can be informed for past market events that can have impact on the upcoming news, so you can have integrated opinion.
- The calendar gives substantial aid to newbies to monitor more effectively their investments.
Economic indicators which deemed lagging and their definition:
Gross Domestic Product (GDP) – Gross Domestic Product (GDP) measures the annualized change in the inflation-adjusted value of all goods and services produced by the economy. It is the broadest measure of economic activity and the primary indicator of the economy’s health. Released on monthly basis. There are 3 versions of GDP released a month apart – Advance, second release and Final. Both, advance the second release are tagged as preliminary in the economic calendar.
Interest rates – Traders watch interest rate changes closely as short-term interest rates are the primary factor in currency valuation. A higher-than-expected rate is positive/bullish for a currency, while a lower-than-expected rate is negative/bearish for a currency. Increase in interest rate set by country’s Central Bank indicates that the economy grows, and inflations increases and the opposite.
Unemployment rate – The Unemployment Rate measures the percentage of the total work force that is unemployed and actively seeking employment during the previous month. A higher-than-expected reading should be taken as negative/bearish for the currency, while a lower-than-expected reading should be taken as positive/bullish for the currency.
Consumer Price Index (CPI) – The Consumer Price Index (CPI) measures the change in the price of goods and services from the perspective of the consumer. It is a keyway to measure changes in purchasing trends and inflation. A higher-than-expected reading should be taken as positive/bullish for the currency, while a lower-than-expected reading should be taken as negative/bearish for the currency. E.g., If the Fed prints more and more money inflation target will increase along with money velocity which shows the average number of times an average dollar is used to buy goods and services per unit of time.
Balance of trade – The difference between country’s exports and imports creates either deficit or surplus respectively.
Some economic indicators which deemed leading and their definition:
Retail Sales – Retail Sales measure the change in the total value of sales at the retail level. It counts the consumer spending, which accounts for most of the overall economic activity. A higher-than-expected reading should be taken as positive for the currency, while a lower-than-expected reading should be taken as negative for the currency.
Purchasing Managing Index (PMI) – This major index measures the activity level of purchasing managers in the manufacturing sector, where a reading above 50 indicates expansion in the sector, otherwise indicates contraction.
Jobless Claims – Initial Jobless Claims measures the number of individuals who filed for unemployment insurance for the first time during the week passed.
- Understand what data is important and what is not.
- Avoid holding trades over data that are new or avoid investing immediately after news coming out.
- Plan how you will or not trade afterwards a major move in the market.
- Understand how key data pauses market before news come out.
- Take into account more factors along with the upcoming news before investing.