3 Ways to Use an Economic Calendar When Trading Forex
Axi | Feb 18, 2019 15:08
Originally published by AxiTrader
No matter if you are trading the global FX markets using technical analysis or fundamental analysis, referring to and using the economic calendar is critical.
The economic calendar is the schedule of upcoming economic events which are likely to impact the financial markets including Forex, Indices, Stocks, Commodities and Bonds.
No matter what time frame you trade across, or how active you are, you will find it important to keep an eye on upcoming events daily.
Yes, even if you are a long-term Forex investor, it will be in your best interest to stay up to date with the major economic releases, their expectation and final print.
Here are the most impactful financial events that move the markets on a monthly basis:
- US Non-farm payrolls (NFP)
- Central Bank rate decisions
- Consumer Price Index (CPI) or Inflation
- Retail Sales
- Produce Price Index (PPI)
- Gross Domestic Product (GDP)
- New Home Sales
- Durable Goods Orders
- Existing Home Sales
- ISM Data
- Trade Balance
Each of the events above are big drivers of volatility, especially in the Forex markets.
None move the market more than Non-farm payroll data, which is released on the first Friday of every month and reports on the health of the US jobs market.
Now let’s look at the three key ways you can use the economic calendar to trade Forex.
h2 1. Intraday trading to take advantage of volatility/h2Nothing makes an intraday trader more excited than volatility.
If the markets aren’t moving, then intraday trading can be an absolute grind.
Key economic data releases are an intraday traders’ shining light. The golden path to pips so to speak.
One of the most common ways for intraday traders to trade big data releases is via breakout levels.
Leading up to Non-farm payroll data, it isn’t uncommon for markets to consolidate or ‘quieten down’ in anticipation of a big move.
So, you want to get all your key levels set for both the long and short side.
Let’s take a look at the Eurodollar around the NFP release on the 4th of January 2019.
First, you want to get clear on a few things, including:
- What is the expectation or consensus? In January, the consensus was for 177,000 jobs to be added. But it printed at 312,000.
- What was the previous month's figure and what happened?
- Did last month’s go above or below expectations and what was the price action like?
- You can also go to Twitter and type in #NFPGuesses, which will give you a huge list of analysts’ forecasts plus every other trader on Twitter.
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Now you are clear on the expectation and previous results, you want to set your key levels.
At the very basic level, you can see we’ve placed a support and resistance line on the chart leading up to the announcement.
It is not uncommon for markets to run on the expectation or hint of the figure printing above or below expectations.
Your next steps will depend on you and how you like to enter the market.
If you are fast on the keyboard, you may like to manually enter your orders as the market breaches your key levels.
Alternatively, you may like to create complete entry orders with respective take profit orders set on both sides.
Here is what happened on the NFP data release on a 5-minute chart for January 2019.
The second style of trading you could employ when trading economic data releases is swing trading.
Swing traders look to trade the swings, and their motto would be to buy weakness and sell strength.
Going back to October 2018, the Eurodollar was in a steady downtrend.
On the 12th of October, the market hit the longer-term moving average and fell lower. It then rallied again up to the 15th of October hitting a double top, in a downtrend and overbought. Plus, the non-purists might suggest there was a hint of bearish divergence as well.
At this stage, a swing trader would be focused on trading this short and looking for any unusual strength to sell into.
An economic announcement at these levels would provide the perfect sell conditions (hindsight permitting in this example).
On the day of the price spike, you had the EU Brexit Summit, Germany’s Economic Sentiment, Europe’s CPI data and ECB’s Praet speech. Plenty of market-moving releases there.
So, a swing trader might look to set limit orders knowing there could be a fake run higher and then sell the strength, as the Eurodollar had been in a downtrend since late September.
h2 3. Momentum trading for breakouts/h2Continuation patterns are a huge favourite with technical traders.
Chart patterns like ascending and descending triangles, wedges, pennants, double and triple tops and bottoms are handy to classify the type of market you are trading right now.
Let’s say a market is consolidating into an ascending triangle pattern leading up to an important economic release.
You may like to scope out your key levels, draw your breakout levels and use the economic calendar to note the expectation and consensus for the upcoming release.
Your bias at this point is the continuation, but as a technical trader, you will find it best to know which major economic release is coming up and then how it might play it if the news is positive.
If it is positive, then you have all your levels set, and you need to pull the trigger.
If the news is negative and it drops back down, you may want to consider it a failed long setup and move on to the next trade.
So, there you have three interesting ways you may like to take advantage of the economic calendar and upcoming data releases.
Hone your entry and exit criteria and be sure to always check the upcoming economic releases before you place any trades. It truly is that important.
It is important to remember that trading around news events can result in significant slippage due to the increased market volatility. In these circumstances it can be possible to lose more than you had initially invested.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
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