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Explaining the Economic Calendar

Part of fundamental analysis, the economic calendar shows the events scheduled for each trading day, week, and even month. Because economic news has a repetitive nature, the economic events for the day, week, and month ahead are known in advance.

But not all of them. Sometimes, when an important person holds a speech or a press conference it is also enough to move markets (e.g., U.S. President speech, central bankers’ speeches, etc.), and the economic calendar will include those too.

The economic calendar is an invaluable source of information. As you know by now, the technical and fundamental analysis go hand in hand.

However, some traders are more inclined to technical trading. They use trend indicators, oscillators, trading theories, expert advisors (a.k.a. robots or trading algorithms) and other strategies in their Forex trading.

For such traders, the economic news doesn’t matter that much. But it should, the economic calendar always matters!

Because the calendar is available to everyone, technical traders know when critical economic data comes out. As such even they should adjust the settings for their trades.

One example comes from scalpers that adjust their setups and expectations because spreads widen during critical economic releases.

Moreover, some technical strategies quietly shut down completely when economic news comes out. Or, trading algorithms may close all positions and won’t trade anymore some minutes before and some minutes after essential releases.

As such, either as a technical or fundamental trader, the economic calendar is crucial for success in Forex trading.

The Economic Calendar in Forex Trading

Previous articles in this Trading Academy covered the importance of interest rates in the valuation of a currency. More precisely, the two enjoy a direct relationship: the higher the interest rate level, the stronger the currency becomes.

Central banks are responsible for changing the interest rate level in an economy. Their regular meetings end up with hiking, cutting or leaving it unchanged.

Between two central bank meetings, pieces of the economic puzzle surface. Traders know the economic calendar, what news comes out next and its importance, so they have the time to position for the next central bank meeting.

Or, they have the time to sell or buy a currency, or to increase or decrease a position in a specific currency pair, or just to ignore a currency due to a broken economy. All options are on the table, and fundamental trader use the economic calendar to make the best decision.

News Importance in Forex Trading

As currencies have different importance on the Forex dashboard, so does the economic news. Some are more important than others.

Because not all traders have an economic background, reading the economic news is not that fun for most. Therefore, the economic calendar helps out with a conveneint feature: it highlights the news importance.

As such, three news categories exist:

  • Lull or dull news. The so-called “third tier data” refers to economic news that doesn’t usually move financial markets. Typically, they have the warning color yellow, highlighting the likelihood to drive the market: almost zero. Such news is the Housing Starts in Japan, for example. While important for the overall Japanese economic picture, the JPY (Japanese Yen) won’t react much to such a release, and traders know it.
  • Second-tier data. Already in this category, there’s the potential for the market to move. Highlighted with an orange color on most economic calendars, they will move markets if the actual release differs much from the forecasted one.
  • First-tier economic news. This here is what moves the market! Inflation, GDP (Gross Domestic Product), Unemployment rate, PMI’s and ISM’s, Retail Sales, Consumer Spending, you name it! Because all of this news matters for the central banks when setting the rates, traders pay tremendous attention to it.

News Interpretation and Historical Data

Forex trading is largely about trading expectations. And fundamental analysis comes with a lot of expectations regarding the future price action.

For example, if inflation or the Consumer Price Index (CPI) is on the rise, the expectations will rise that the central bank will hike the rates at the next meeting. Therefore, traders jump and buy the currency. However, it doesn’t mean the reaction will be the same every time, only the expectation of it is the same.

To leave no room for error, the economic calendar presents a description of the incoming news. Moreover, its interpretation as well.

In other words, it tells traders what to expect from such a piece of economic data, if it is bullish or bearish for a currency. And, which currency too.

However, the essential feature comes from historical data. Economic calendars provide tons of historical information.

Care to know the unemployment rate in the United States for the last several years and its monthly evolution? Just study the economic calendar!

Savvy traders use the data to plot detailed charts. They look for trends in consumer spending, and economic sectors, to spot downturns or upturns in the economy.

Then, armed with such information, they turn their attention to Forex trading and act accordingly, on expectations about what the next central bank’s move will be.

Previous, Forecast and Actual Data

These are the three numbers that make up every economic release. Providing it deals with figures, any economic data shows the former number and the forecast for the current period (typically a month).

Traders know both values in advance, courtesy of the economic calendar. The forecast represents a survey of economic outlets regarding a specific piece of financial information.

Next, the focus shifts to the actual release. Depending on how much it differs from the forecast and the previous data, the market swings will be more or less critical.

For example, one of the most looked-after pieces of economic data is the Non-Farm Payrolls in the United States. It shows the shape of the jobs market, and the Fed considers it before changing the interest rate level.

The higher the number, the better for the economy and the currency, the U.S. dollar. If the actual number is MUCH higher than the forecast, it beats expectations. The dollar will surge.

On the other hand, it if misses the forecast, the dollar will slip. The more significant the difference between the actual and outlook, the bigger the market’s reaction will be.

Conclusion

The best part of the economic calendar is that it is free. Free to use, free to interpret…just search the Internet for it and you’ll find plenty of sources ready to give it to you for free.

After all, it is public information. Traders have no excuse not knowing why the market reacted at that exact moment during the trading day.

The economic calendar points out the:

  • Economic piece of data to come out next
  • Its importance
  • Its interpretation
  • The typical reaction
  • The currency affected
  • The exact time of the release
  • Previous, forecast and actual data
  • Historical data

What else to know in advance from an economic point of view? Pretty much nothing.

In time, because of the repetitive nature of the news that makes up the economic calendar, traders learn to calibrate their expectations. As such, they discover that the market typically ranges before an important release. Hence, they keep realistic expectations in their Forex trading.

Either a rookie or an experienced trader, a technical or a fundamental one, an economist or not, the economic calendar is an integer part of Forex trading. One simply cannot trade without considering at least some of the information it provides. For free!