How to prepare a trading strategy using an economic calendar?
Trading the Forex market requires the ability to watch what is coming in advance. We all know that predicting the future with absolute accuracy is not at all possible, but there are plenty of signs which can be very helpful. Analyzing what these indicators are, and how to act on them, can make all a very big difference. The first element that you need to master is identifying which point or economic data point you should be trading on. Every Friday, upcoming economic events are released on an economic calendar. Each event is graded ‘hight’, ‘medium’ or ‘low’ depending on the estimated market impact. Every Forex trader should watch the calendar daily and find a data release that presents a good opportunity for the coming week.
Consider the following hypothetical scenario for the eurozone: The European Central Bank has announced that it would raise interest rates as soon as the consumer price index (CPI) reading touches +2.1%. Now, if the coming CPI release for a certain day of the week is expected to be +2.3%, we know that the traders will be purchasing the euro in anticipation of the good data release. This is because the central bank has openly stated that they will raise interest rates on the as soon as CPI reading touches +2.1%. Due to this, traders would be interested to buy the euro in the days before the CPI data published. In order to take advantage of these kinds of trades, you must have a good grasp of what every central bank is focusing on. By keeping an eye on this you will be able to understand which economic data release presents good opportunities.
Can I trade a few days before a news release?
If you can’t sit glued to your computer screen waiting for exactly the right opportunity, it is also possible to enter at market price a couple of days before the data release. You should aware of a number of factors in executing this strategy. Firstly, how much amount you can afford to lose in order to stay in the Forex market? The markets continuously ebb and flow and you may find your open trade go into a loss position as you await the data to release. If you open the trade as soon as the opportunity presents itself, it is very difficult to be aware of what your maximum loss forbearance is. Then there’s the question of when to exit open trades. The typical moment to exit this strategy is just before the data is released. Always keep in mind that you are trading the market’s expectations in the run-up to the event. So, it makes sense to close open positions before the data is released. However, if you are in good profit, you may want to hold your position through the economic data release in case there is a surprise which you can take advantage of. For example, US rate hike- the Fed came out indicating that even more rate hikes may be on the way on the 20 October meeting. So, the expectations surprised the markets even further.
Let me give you a few bullet-points to answer how to use an economic calendar:
- Every trader should watch the economic calendar on daily basis to get a clear picture of major economic events which will be published during the day and analyze their impact on currencies
- If you have open trades on some of the affected currencies, consider closing your open trades if you think the release will not go in your favor.
- Normally, you’ll find previous and forecasted numbers for each release in the economic calendar. if the actual release lower than the forecaster number, it should have a negative impact on the base currency. And vice-versa, If the actual release is higher than the forecasted number (for GDP for example), it should be beneficial for the base currency. No doubt, this is not true for releases such as unemployment rates, which are better to be lower than the forecasted number.
Bonus: A better way to forecast the releases is by looking at the trend of previous numbers.
The main motive behind the economic calendar is to actually alert you about the major moments of the highest volatility. Once you start your trading day, it is highly recommended to actually check about the economic or fundamental events that are to be released today and the coming day and to understand their impact on your open positions. In case are not a fundamental trader, it is recommended to simply note down the times of the major news releases on daily basis.