A tool every trader needs is an economic calendar, which displays a schedule of events to be unfolded and possibly influencing the financial markets. These events range from economic reports to central bank meetings, geopolitical developments, and any other indicator of volatility. Keeping the mentioned goal in mind, understanding how to use an economic calendar well can surely help get wiser, minimize a risk, and optimize a trading strategy.
Understanding Economic Calendar
An economic calendar is a tabular display of the date and time for forthcoming events in economics. Typically, it would include major economic reports such as Gross Domestic Product, inflation data, employment reports, interest rate decisions, among other economic indicators. In the calendar, forecasts or predictions of what analysts expect the results to be often get included, as well as the previous data so comparisons can be made.
A perfect example could be a forthcoming non-farm payroll report from the U.S., which is considered an overall indicator of employment growth in the country, would be an event with the power to move not only currency pairs such as the EUR/USD but all financial markets. Based on the calendar, the trader can expect how the market would react and position themselves in advance.
Volatility Role in Trading
Some events in the economy are more volatile than others. Decisions on the interest rate by the central bank and major reports like the Consumer Price Index usually have higher impacts than minor releases. Many times, the economic calendar will give some sort of measurement in terms of how much volatility is expected—usually one to three icons, with three being most volatile.
It is important to evaluate the volatility potential, and how the volatility might align with your risk tolerance and trading strategy. High volatility can mean wide wild price swings offering good profit-making opportunities, though with increased risks of loss. The trader should consider this information to make a better decision if he wants to enter into trades prior to, during, or after the key data release.
Focus on Relevant Events
Not all economic events are of equal importance to all markets. Some events will have greater relevance to you than others, depending on which asset is being traded—forex, stocks, or commodities. For example, if you trade the EUR/USD pair, meetings of the ECB and U.S. Federal Reserve statements will more than likely be crucial. On the other hand, if you’re an oil trader, reports concerning oil inventories or OPEC meetings would be much more relevant to you.
Successful traders learn to filter out the noise and train their ears toward those few events that mean the most to the specific markets on which they are focusing. Most economic calendars offer filters that enable users to focus on key regions or sectors to help streamline the data and avoid distractions.
Planning Your Trades
Probably the most important reason to use an economic calendar is so you can make trades ahead of time. For example, suppose you know that a GDP report is coming out; you would study historical trends and market expectations in an attempt to evaluate how the markets may act on that announcement.
Some traders are going to trade in front of the event, looking to speculate on what will happen. Others may choose to wait for the event and the release of the data, and then trade the reality of the news event. Whatever method you decide to use, having a plan via the economic calendar lessens the opportunity to make impulsive or emotional decisions.
Risk Management
While the economic calendar helps one to prepare for events that move the market, a risk management strategy should be inculcated. This is because market reactions to economic events cannot always be predicted and tools like stop-loss orders and position sizing are essential in preserving your capital. With the economic calendar guiding you on when to make the trades and using strategies of risk management, the chances of incurring unexpected huge losses are limited.
Conclusion
The economic calendar is a powerful tool in the armory of a well-informed trader about market-moving events. Knowing how to most profitably apply this tool, target appropriate events, and plan trades around key releases will go a long way in helping a trader attain success in the markets. Whether it be a forex trader, a stock investor, or a commodity speculator, the inclusion of the economic calendar in one’s daily schedule will definitely give an edge in terms of anticipation of market movement.
