Most traders believe that the current exchange rate or the price of a security reflects all the currently available information. Prices move when new information becomes available. Of course, there is always noise that will whipsaw prices around a range, but for an exchange rate to move to a new range, new information must become available.
New information can come at any time, but some of the most important information is scheduled. This includes economic data, as well as monetary policy decisions. Since the information is scheduled you can use an Economic Calendar to trade around as the new information becomes available.
The Most Important Economic Events
An economic calendar is a schedule of economic events that will take place over the next day, week, month or quarter. An economic calendar will tell you what time a release will take place. In addition, many Forex media sites and brokers offer an economic calendar that includes an estimate that is generally the average of several analysts who are covering that economic release.
There are several very important economic indicators that are market moving events. For example, the employment report in the world’s largest economy (Non-Farm Payrolls), the United States, will consistently generate volatility. The Consumer Price Index (CPI) that measures inflation in the U.S., Europe, Japan and the rest of the developed country, provides insight into price changes and this can be a driver of interest rates and currency exchange rates. Growth is reflected in an economic release called the GDP (Growth Domestic Product). Monetary policy changes by central banks, including the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan, are key events that drive market volatility.
Trading the economic calendar or economic events applies also to commodities and other instruments. For example, if you trade crude or brent oil, you must be attentive to the EIA weekly petroleum report published on Wednesday. Also, The USDA grains report is published once a month and generate high volatility if you trade any of the grains/softs commodities (corn, wheat, soybeans, coffee, cotton, etc).
If the market is surprised by an economic release, you can bet there will be volatility. This happens but is more the outlier than the norm. Analysts from around the globe report their forecasts, which are reflected in an average, with highs and lows by analysts noted. If the actual release is unexpected, the markets will change to reflect the new information. Additionally, market changes after new information can be sharp and nasty. If you monitor these whipsaws in the securities or currency pairs you are trading, you will see that many times these events generate a breakout in the direction of the trend.
Trading the Economic Calendar
Since volatility will follow in the wake of an economic release, you will have an opportunity to take advantage of this situation. Economic releases are generally released like clockwork at a regularly scheduled time during a month. Most releases that are of significance come out once a month and generally reflect the economic situation during the prior month. For example, the May unemployment report in the United States will be released at the beginning of June. There are several economic releases that come out weekly including unemployment jobless claims and the Department of Energy’s inventory report. As a trader, once you find your broker and platform to trade with, you must follow the economic calendar on a daily basis.
How to Trade Economic Events
You can employ several strategies to take advantage of economic releases. You can use a purely technical strategy, or you can combine a technical strategy with your view of what has happened. Additionally, you need to provide yourself with robust risk management. Trading around the numbers can be very risky if you take a position before an important event. If you decide to initiate a position before a market moving event, understand that you need to incorporate illiquid market conditions into your risk management process. Stop losses when markets are illiquid can generate huge slippage. One way to measure this risk is to evaluate the changes in the price of the exchange rate you plan on trading following specific economic releases. If you find for example that the average range of the EUR/USD in the hour following the Non-farm payroll report is 50 pips, you should understand that your stop loss could be at least 50-pips.
A more conservative approach to trading the numbers is to wait for the results and then formulate a view within 30-minutes of the release. As traders begin to jockey for position, you can avoid the initial whipsaw price action as an exchange rate finds a range. Many times, an exchange rate will break in one direction and then consolidate before it continues to trend. Other times the initial move is a fake out. You can combine some technical analysis into your trading to determine a market has positive or negative momentum.
There are hundreds of products you can trade to take advantage of the new information. By trading currencies as well as Contracts for Differences (CFD), you can take a view of most financial instruments. A CFD allows you to trade indices, commodities, cryptocurrencies, and shares. Companies like HQBroker, provide a state of the art CFD trading platform that will allow traders to take a view on a financial instrument while watching economic releases in real-time.
The capital markets are efficient markets, and most investors believe that all the currently available information is incorporated into the price of a security or exchange rate. Prices generally begin to move when new information is available such as economic data, or a change in monetary policy. Market noise will generate minor fluctuations in prices and add to volatility. You can track changes in economic releases by using a financial calendar where the time and date of most economic releases will be posted.
Additionally, you will be able to find the average analyst forecast which is measured against the actual release. Once this becomes available an exchange rate will begin to move if the forecast is different from the actual release. Obviously, there are degrees of surprise, but if the market is caught offsides it will experience volatility.