Understanding The Forex Economic Calendar

In Forex trading the economic calendar refers to scheduled economic releases that have an impact on a currencies value and/ or the market as a whole; these calendars come packed with other useful information for traders.

Economic releases have an impact on trader sentiment and valuation, the influence on price is usually short term but, in significant cases, the impact can be long term. 

Now that we know what economic calendars are, to get a full understanding, we will look at the following:

  • Where can you find economic calendars?
  • Example of an economic calendar.
  • How to interpret the information provided?
  • High impact news events.
  • Why is it important to know about releases?

Where can you find the economic calendar?

All economic calendars are organized sources of relevant news events, however, not all are created equal, the following are the best economic calendars to use.

 

Another important aspect is having an understanding of the data and how it could impact the relevant exchange rates, achieving this can be done through research, reading relevant articles as well as soaking up expert information from sources such as Bloomberg and CNBC.

 

Example of an economic calendar- Daily FX

How to interpret the information provided?

Let’s break down the example from above:

 

Time- Provides the time that the information will be released on a given day (usually the date is selected beforehand). It is important to change the time-zone section on all websites otherwise the time provided may be incorrect for your location. Knowing when a release is taking place is essential so you can plan and take relevant actions.

 

Relevant currency and/ or area- Lists the area the data is coming from and/ or the relevant currency, this is rather easy to understand, you don’t want to be focusing on a chart of EURUSD if the release you want to trade is coming from Canada. 

 

Impact– Rates the expected market reaction based on the importance of the data being provided. Low means the release should have little impact on price fluctuations, medium predicts a mild effect, and high suggests that there will be large movements and high volatility.

 

Actual- This is the actual data which is updated as soon as the information is released, the number provided is what traders base their decisions on and, by extension, is the most important consideration (the other numbers are already priced into the market)

 

Forecast- Forecast numbers are based on predictions from economists (calculated on past data and other relevant economic occurrences), this is already priced into the market, however, the larger the difference between the actual release and the forecast number, the greater the market reaction to the news. 

 

Previous- Shows the number from the previous data release and is usually used to plot unfolding economic developments, the previous number provided is the same piece of economic data e.g. if the relevant event is NFP then the previous section shows the last NFP release from a month earlier.

 

The type of number provided depends on the economic release e.g. CPI is given as a percentage (2%) while NFP is a simple increase or decrease in job growth (+60K jobs)

High impact news events

Volatility before and after a release, as well as the market’s reaction, depends on a variety of factors. Two of the main factors are the economic data being released and the relevant currency, focus on the following events and currency pairs.

Some major events:

  • Interest rate decisions.
  • Employment statistics.
  • Gross domestic product (GDP).
  • Consumer price index (CPI).
  • Producer price index (PPI).
  • Consumer sentiment/ retail sales.
  • Trade balance.
  • Reserve bank policy changes/ meetings.

 

News releases such as the above will usually be marked as high importance on the economic calendar since they often cause increased volatility.

Major currencies:

  • US Dollar (USD)
  • Euro (EUR)
  • Great British Pound (GBP)
  • Japanese Yen (JPY)
  • Swiss Franc (CHF)
  • Canadian Dollar (CAD)
  • New Zealand Dollar (NZD)
  • Australian Dollar (AUD)

 

This is not to say that economic news from other countries is not relevant, the pairs including that currency will be affected, but pieces of data from the above parties can alter the sentiment of the market as a whole. For example, data from South Africa will influence all exchange rates including the ZAR, but a major economic announcement from the USA can shift participant’s perspectives of the entire market. Resultingly, it is important to have a keen eye on the developments of the major currencies.

Why is it important to know about releases?

They affect prices, that should be reason enough. Knowing the time and potential impact of news is important for the following reasons:

 

1. Risk management

Foremost, your open positions could be affected by the news, it’s best to know when and what is happening so you can manage your open positions. The following 2 points also fall into risk management.

 

2. Spread

Spread is the distance between the bid and the ask price, larger spread requires a greater move in your favour to cover costs. Economic events lead to volatility spikes which, in turn, cause a larger spread. Risk considerations must be completed before opening positions around the time of news releases.

 

3. Slippage

Slippage occurs when there is a quick move in price, with no action in between, meaning a trader could be filled at a worse price than intended. The risk of slippage is higher when there are economic releases, this should be factored in before deciding to open positions, however, because Forex trading is liquid there is less slippage.

 

4. Can affect strategy performance

Certain strategies may provide false signals if traded at the time of news events therefore it is good to analyze the impact on your strategy and then adjust accordingly.

 

5. Trading economic releases

Many traders have strategies dedicated to news event trading and, when implemented correctly, it can be an extremely profitable methodology. If you are the type of trader who enjoys shorter-term trading, the quick moves provided will suit your personality.

 

In conclusion, don’t think that you have to obsess over the economic calendar and use it in all your decision making. Yes, some traders focus purely on news, but that doesn’t have to be you. If this type of trading does not appeal to you then the take following away- Be aware of economic events so you can manage your risk and positions better, both are better for your results.

Don’t let the news release surprise you or your positions.

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