How to use a forex economic calendar
Forex economic calendar is used by all types of traders to adjust risk or to perform better fundamental analysis. It lists all the economic events that have an influence on foreign exchange rates. This article gives you an overview of what it is and how to use it.
What is an economic calendar?
It’s a tool that gives an overview of important events ahead. You might already be familiar with indicators such as GDP (Gross Domestic Product), CPI (Consumer Price Index), and the NFP (Non-Farm Payroll) and such. Usually, the events listed in the calendar are labeled as low / medium / high. This indicates the importance of the news and what kind of effects you would be expecting to see in the markets. For example, you can find the most volatile market moves during the Non-Farm Payroll event. Here’s a list of events that usually have the biggest impact on markets:
US Non-farm payrolls (NFP) - It’s an employment report released monthly, usually on the first Friday of every month. It represents the number of jobs added, excluding farm employees, government employees, private household employees, and employees of nonprofit organizations. It has the most effect on the US dollar.
Central Bank rate decisions - Central banks control the production and distribution of money and credit for a nation. Banks like the Federal Reserve (FED) and the European Central Bank (ECB) make decisions on interest rates about 8 times a year.
Consumer Price Index (CPI) - It expresses the change in the price of consumer goods and services.
Retail Sales - It tracks consumer demand for finished goods by measuring the purchases of durable and non-durable goods over a defined period of time.
Produce Price Index (PPI) - Is a price index that measures the average changes in price received by domestic producers for their output.
Gross Domestic Product (GDP) - A measure that reflects the value of all goods and services produced by an economy in a given year.
New Home Sales - Published monthly in the United States and measures sales of newly built homes.
Durable Goods Orders - Published monthly in the United States and measures current industrial activity.
Trade Balance - As the name suggests, it’s a balance between exports and imports of total goods and services.
Forexbook economic calendar gives you a quick and simple overview of those news. You can see what event is up next, the impact of the news (low, medium, and high), what currencies are affected, and what the news is about.
How to use an economic calendar in forex trading
Trading during the news event is not as easy as it may look. The currency can move in any direction and not be dependent on the outcome of the event. Many newcomers who are just starting out with forex are attracted to the volatility and price movements that the events cause. Usually, the trading strategies involved during the news require setting your stop loss way higher or lower than you usually do to avoid getting stopped out by a strong zig-zag movement. This, however, can result in a quick and unexpected loss as the news outcome could be positive for the currency but the currency ends up moving lower.
Usually, there are three outcomes of a high volatility event like Non-Farm Payrolls.
- The price starts moving sharply in one direction and spikes, then comes down, spikes again, moves back to the level where it was before the news, and stays there for a while until the natural movement returns to the markets.
- The price spikes up, retraces for a while, and continues moving upward.
- The price spikes down, retraces for a while, and continues moving downwards.
Here’s an example of a chart during the NFP event on December 4th, 2020 (Friday) which represents the number of jobs added in the US. The previous month's result was 610K, the forecast was 500K but the actual result was 245K. With this information we can expect the USD to weaken and using an example of EUR/USD 5 minute chart, we would expect EUR to get stronger.
The EUR/USD spiked up for about 15 pips and came back down within the same 5 minute period. Moved back up a little and then moved down for about 28 pips.
So why did the EUR/USD go up just a little bit and then moved down so much more although the news was positive for the EUR and negative for the USD? This is actually something that happens quite often - the price of the market movement is not in correlation with the outcome of the news. There are many underlying factors that cause this and the outcome is hard to predict. There are many players involved in the market and the biggest of them are big institutions that have the means to move the market in their favor. This doesn’t mean that the market is manipulated by those institutions but they have huge amounts of money involved and for them to enter or exit the market, they need liquidity. When the outcome of the news was good for EUR/USD there was strong buying activity from the retail side and when the institution is planning to make a SELL order, it needs liquidity from the BUY side.
This is why it’s not suggested to make trades during the high impact news as it’s impossible for retail traders (like you and me) to know what’s really happening. The best strategy for trading during economic news is to stay on the side and wait until the fast price movement period is over. It’s usually only during the first 15 minutes and then much more natural movement returns.
In conclusion, always keep an eye on the forex economic calendar to know when to expect higher volatility in the markets. Forexbook has made a calendar that is easy to follow so you can make sure that you are never caught up during those high impact news.