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How to trade forex using the economic calendar

October 18, 2018
BY Emma Richards

If you’d like to trade forex at a whole new level, then it’s time you started checking the economic calendar. There are many economic news releases and events that can affect a forex price. From the Central bank announcing a new rate for the CPI, to non farm payroll reports and inflation, these financial blockbusters can push and pull forex currency pairs and even the stock market. Knowing when such influential events are approaching and how they will affect the global market can make all the difference in your trading performance.

If you’re not checking the economic calendar to trade forex, you might sometimes feel like you’re wandering through the wilderness without a map or compass. Moreover, if you are using economic indicators that use complex algorithmic computation, you might be seeing some dramatic price shifts that were not forecasted by those technical tools. This article will explain why forex traders place such high importance on the economic calendar, and how you can use it to help significantly improve your understanding of international market moves.

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Why is the economic calendar so important for forex trading?

The economic calendar is a list of news events that cause some of the highest volatility levels in the financial markets throughout the year. It’s perhaps the most underestimated resource that a newbie trader so often overlooks. If you don’t think the economic calendar has value, think again.

The economic calendar is the closest thing a trader will ever get to a crystal ball. Rather like fortune tellers, you won’t get any kind of guarantee from the information, but what you will get is a point from which to look with extra attention. The announcements will warn you of upcoming volatility so you can trade with caution and ride out crazy price shifts. Alternatively it will warn you of expected volatility so you can trade the crazy times. It all depends on what kind of trader you are. Whether you are a conservative trader with a limited budget or a fearless profit hunter who likes high risk/reward events, the economic calendar is just what you need.

Conservative Trader

It’s really very logical. An economic event worthy of being featured on an economic calendar is a big deal in the market. A national election or central bank release tends to affect interest rates for that country, but can also influence the global market in general, and can drive forex trading volumes through the roof at the moment of the release. If the bank report shows the EU economy to be strong with a bright future, traders will BUY Euro related currency pairs. If the economic news release shows a worrisome future for the Euro, then traders will SELL (short) the asset.

A conservative trader with a limited budget might consider avoiding the carnage that follows an economic calendar release. Some traders will jump on the money train for a quick hit then sell on a high. When thousands of traders BUY an instrument at the same time, the value of those specific instruments can increase in minutes and make a noticable market impact. Then many trader SELL on the high and the value falls rapidly. This wave of buying and selling is what causes volatility. If you BUY right before a big selloff, you’ll see your investment crash. Timing is always important, but during an economic release it can be dangerous.

Some forex brokers–known for providing favourable financial services–choose to protect their clients by freezing access to risky instruments just before and after the release, then reopen accessibility once the first wave of volatility subsides. This restriction is beneficial to newbies traders, but ambitious professional traders might have a more fearless approach.

Fearless profit hunter

The fearless profit hunter is a trader who will go “all in” on an asset when trading CFDs. Perhaps the news, economic forecasts, the technical indicators, and the postman all agree that an asset is going to go in a certain direction. Whatever the reason, the fearless profit hunter will invest a large amount of money with high leverage looking for a big payday. These “all or nothing” traders don’t worry about losing it all. They fund their trading account with money they can afford to lose and they aim big. Such a strategy is not recommended, but a certain amount of confidence is needed. It’s a two-sided coin. Fortune favors the brave, but fools rush in.

Since a market flatline offers no opportunity for profit, the peaks and troughs are the most lucrative time to trade, but they are also the most risky. The first people to trade after the economic calendar news release tend to get the lion’s share of the profit, or a very fast trip to Stop Loss city. If you like the sound of high risk and high reward, then trading on economic calendar events might be just what you are looking for.

Be warned, even if you choose the right direction, there might be a massive jump in the opposite direction before your order turns profitable. Your emotions will be rattled as you see your equity getting sucked dry with every second as you hope and pray that a reversal will come. It’s scary, but you’ll know why it’s happening. Imagine the emotional torcher of a forex trader who doesn’t. The calendar gives a warning before the volatility happens.

The Smart trader

Just what is a smart trader? Perhaps a trader that doesn’t take unnecessary risks? The economic calendar can be used by smart traders too. If the sentiment of an economic release is positive, the assets connected to the news often continue to rise or fall, long after the volatility has subsided.

A smart forex trader waits for the carnage to calm, evaluates the options, then chooses an opportune moment to open a trade and ride the more stable price shifts.

What the economic calendar shows

The calendar includes the date and time of the economic news release, the forex currency that will be affected, and the level of importance: high, medium or low. Any of the events on the calendar can generate massive profits or losses through volatility.

exness calendar

A typical example of an economic calendar. Note the highlighted event indicating high importance.

Buy or sell after the news release?

So now you know that trading using the economic calendar is not suitable for all investors. But, if you are a smart conservative trader wishing to invest in the forex market using economic events, you’ll need to figure out how to read the situation before the release and then choose the BUY or SELL after the volatility has settled.

Basically, market volatility makes it very difficult to recognize a trend. A trend is when the price seems to have a long-term direction that it will stick to for the foreseeable future, with only minor deviations. In other words, the rocky landscape of the forex price line won’t be so epic. Once price moves have settled, time to consider making a trade.

What did the economic release suggest? With most major economic events, you’ll find a scoring system. You’ll see last year’s release number, the current score, and the forecasted score. If the actual release score is the same as the forecast, you can expect more of the same from the asset price. If the release is higher than expected, traders usually take this as a call to BUY. Lower than expected means you may avoid trading, or consider a SELL order.

Does the trend (after volatility) agree with the economic score? Perhaps you’ve just discovered a trading opportunity.

Setting up your forex trades

Savvy currency pair traders rarely risk more than 3% of available equity. When their trading account balance reaches a substantial amount that offers flexibility, that investment percentage can be even lower. A pro trader with $10K in equity might not want to risk $300+ every day unless their confidence level in their selected trading products is high. Such figures can lead to significant losses.

For a beginner trader, an example of 3% means A $6 daily trading budget from a $200 deposit. $6 available for investing each day might not sound like much, but smart traders tend to think a little more long term and use the compound effect.

The concept of using the compound effect is simple. The daily budget can only rise when the equity rises. When losses occur, the daily budget drops. Such a money management system will allow you to survive the bad days but also scale up when your performance is good.

When market reports are released, forex traders face the risk of slippage and often get worse prices than the executed order. You might consider closing positions five to ten minutes before the data release just to be safe. Use the calendar as a warning system. Close your orders before the news releases, wait for the prices to stabilize, then open new orders based on what the release suggests. Set your leverage at a modest or conservative level, set generous Stop Loss and take profit, and make sure you have plenty of equity to ride out the initial storms.

Reward and risk

Jumping on a forex currency pair right after a market release can produce significant gains, but the oscillations can be dramatic. If you’re using high leverage you can be at risk of a margin call in mere minutes. Even if you don’t want to incorporate the economic calendar events into your trading strategy, it’s still wise to check the calendar daily along with the financial news before opening your trading platform. Consider whether you want to be a part-time hobby trader or build your knowledge and experience with the aim of one day being a pro forex trader.

To maximize profit, you need to open and close orders at the best possible time and avoid surprises. Compare it to a daily commute to work and back. When will you leave the house? When will you leave work? Timing is everything. Five minutes early can avoid rush hour. Set off late and you get jammed with everyone else.

Checking the economic calendar is like checking the local traffic reports before leaving the house. A forex trader can avoid a lot of misery by staying current on market events… losing money being the primary concern.

To rephrase the common saying, with great reward comes great risk. The calendar can be used in two ways, depending on what kind of trades attract you. If you are more of a hit-and-run forex trader or day trader, the market volatility of a news release can offer excellent opportunities for speculators with a high appetite for risk.

Last tip

  • A trading strategy can improve your trading results.
  • Indicators and technical analysis can improve trading results.
  • Using the economic calendar can improve trading results.
  • Following news and researching the forex market can improve your trading results.
  • Matching leverage with your funds and using Stop Loss and Take Profit can improve your trading results.

To make the most out of forex trading, it would be wise to do all of those things. But remember, the markets can be wildly unpredictable, especially currency pairs, so there are no guarantees. The central bank might release favorable news about interest rates or some event of great influence, but the markets might not react the way everyone is forecasting, so being prepared to adapt and react quickly is key.

Trading is a lot like life. Full of surprises, some good, some not. Be prepared for anything, learn every day, keep your cool, and don’t get emotionally attached to an investment and wait too long to close it. A rotten apple will never taste good, no matter how long you wait.

To know more about trading forex with the help of calendar events and how to benefit from coming market releases, sign up with Exness and get access to the most updated educational library, expert-hosted webinars, and much more.

Exness is a reputable company that provides financial services to millions of people around the world, and has done with pride for over 12 years. Exness are registered and regulated in more than one country and is affiliated with the world’s most popular payment systems so traders can enjoy easy deposits and instant withdrawals. Moreover, Exness encourages long-term relationships with traders and makes every effort to help them benefit from expected volatility whenever possible.

Use the Exness economic calendar today, avoid crashes, and know where the money train is going before you get on.

>> START TRADING ON THE ECONOMIC CALENDAR NOW <<

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