Learn How To Use An Economic Calendar – What Key Events To Look Out For
Mar 30, 2021 12:01PM
10 min read
What is an economic calendar, and why on earth would a Forex trader need to understand how to use one?
We've mentioned economic news throughout the guide about how it can affect the Forex market. Every day, twenty-four hours a day, worldwide, there is some economic news happening. As a Forex trader, it's useful to have an awareness of the upcoming announcements and understand the potential impact the economic news may have on the currency concerned and, in particular, any trades you have open or are planning to open.
What Is An Economic Calendar?
An economic calendar is an online resource that features a list of scheduled dates for worldwide economic announcements. Not all economic news is relevant to Forex because minor reports have little to no effect on the Forex market.
Thankfully, an economic calendar shows you what is essential. Most economic calendars specify if the news is likely to be of low, medium or high impact. Some economic calendars have a colour rating. Red is high. Orange is medium and yellow is of low impact. For Forex trading, we are only concerned with red, high-impact news.
It's a good idea to check the economic calendar daily when the Forex markets are open. Or spend non-trading time at weekends studying the calendar for the week ahead
It's possible to scroll through an economic calendar to search future dates for high impact events. Planning ahead can help you to spot entry opportunities for currency pairs you are watching. As you gain experience at understanding the economic calendar, you start noticing that, before a major economic announcement, the currency you are watching may appear to be stalling for time, staying in a tight range with little price action. Then, after the news, price action gets into gear, and the currency pair you are interested in finally starts moving.
Ensure you set the time zone of the economic calendar to that of your country to be relevant to your trading time.
Why Should I Use An Economic Calendar?
The key reason for using an economic calendar is to manage your risk. At times of high impact news relating to the economy, the Forex market increases in volatility. Following the high-impact announcement, significant price movement can occur on the Forex charts in a short space of time. The price may spike up or down and then come crashing back the other way. If you are in a trade, this could trigger your stop loss. If you are planning an entry, you could be out of the market as fast as you open the trade.
After the release of economic news, the turbulence of the chart's price action can appear to be out of context. For instance, The US unemployment figures may improve, but the USD plummets on the chart. One would expect it to be the opposite.
The response of price action to economic news can be confusing for a novice Forex trader. The critical takeaway is it doesn't pay to assume what may happen after impactful data is released. What happens next depends on whether the announcement is better or worse than expected.
The potential benefit of working with an economic calendar is that it can help you plan for your trades. It's not unusual for the price to move to support or resistance areas after the news release. This price movement allows you to watch and wait to see if the price zone will hold, and the price will move back in the original direction. Or, will it break through and signify a new high or a new low? Following the economic news release, look to see if price action has moved to support or resistance.
Below is an example of Non-Farm Payroll (NFP), which is the first Friday of every month.
On the right-hand column, the first set of figures is the actual result, the middle column is the projected forecast, and the final column is the previous month's figures. Look at Non-Farm Employment Change. The projections were 85k, but the result was 49k. Unemployment rates were relatively stable with a small drop. Average hourly earnings were 1% lower than expected.
If we look at the EURUSD chart below for this date (5th February 2021), you can see what happened at the time of the news release.
The above picture is from the 1-hour chart for EURUSD.
As you can see, before the NFP announcement EURUSD was moving sideways, with no clear direction. You notice small candles with no clear indication of probability. After the news, USD weakened because of the significant discord in employment projections. USD was unable to gain strength, and so, the EURO took hold of price action. It continued to trend upwards for some considerable time until it hit a resistance zone. Here, it tested the area several times.
When Should I Use An Economic Calendar?
Make it your daily or weekly practice to look ahead on the economic calendar. Highlight the red – high impact – news and adjust your trading around these times. It's easy to forget to make this a habit, but it will become second-nature once you get used to it. A few minutes a week could help prevent unnecessary losses.
Find your favourite Economic Calendar and get it set up to your liking. You may wish only to see red – high-impact – news, so a quick check is more manageable. Read the below details on the types of high-impact news that may affect price action on the Forex charts. Then, look out for these on the calendar.
What High-Impact Data Should I Watch For As A Forex Trader?
There are several significant, high-impact economic releases every month or quarterly. The majority of statistical announcements compare with previous figures. If statistics are higher or lower than expected, this is where the news release tends to have an impact on the Forex market. There is no guaranteed way of knowing how an announcement may affect the direction of the currency involved. So, it's best to wait for the perfect moment to take an entry into the market.
Below we have listed the top ten high-impact data releases. These are not in any particular order.
- GDP
- Non-Farm Payroll
- Average Hourly Earnings
- Unemployment Rates
- Consumer Price Index
- Central Bank Intervention
- Employment Change
- Retail Sales
- Monetary Policy Statements
- Cash Rates
The above is a helpful list of 'red', high-impact news to look out for on the economic calendar. Below, we will work through each one and explain why these are of significance to price action and the Forex trader
GDP
GDP is an acronym for Gross Domestic Product. It's a measure of the health and size of a country's economy. Data is collected from thousands of companies to provide the total value of goods and services produced in that quarter. It also adds in the income of the population and what their spend was. Household spending accounts for about two-thirds of GDP. When the GDP rises, it means the economy is growing, and the public is buying consumer goods. Businesses are spending, which is an indication of confidence in the economy. If GDP falls, it's a reflection of a stagnant or falling economy.
GDP is typically measured over a quarter of a year.
Considering the above facts, you can see how the GDP data announcement can influence the Forex market. For instance, if the UK's GDP announces less than projected figures, it will likely reflect negatively on the GBP in the Forex market.
Non-Farm Payroll (NFP) .
NFP is also known as Non-Farm Employment Change, and it’s released once a month, on the first Friday of the month at 8.30 am EST (1.30 pm GMT). The statistics show rising or falling employment levels in the following sectors, compared to the previous month.
- Manufacturing
- Construction
- Goods Companies
The US Bureau of Labor gathers the statistics. It does not include jobs in agriculture, private households or non-profit organisations.
The effect of NFP on the market depends on how the figures released compare with the projected data. Some Forex traders actively trade the NFP release as they expect large movements in USD currency pairs.
Average Hourly Earnings
Average Hourly Earnings are reported simultaneously as NFP and announce average hourly earnings for the last month, compared to the previous month.
Unemployment Rates
Unemployment Rates are also released with NFP and declare the levels of unemployment compared to the previous month. The level of unemployment in the US can signify a reflection of the state of the economy.
Consumer Price Index
The Consumer Price Index (CPI) is a measure of the average change in prices for a basket of consumer goods.
CPI also measures services such as transportation, food and medical care. The calculation forms from assessing individual price changes for separate items in a predetermined basket of goods, taking the average for the whole. For example, in simple terms, a basket could contain bread, butter, milk, cheese, vegetables and fruit. If the basket contents' cost is higher than the previous, it shows the cost of living has increased.
CPI, therefore, is a measure of the cost of living, and the statistics identify a state of inflation or deflation. It's an economic indicator for government and businesses. As such, unexpected changes in the CPI can significantly impact the Forex market and the currency concerned.
Central Bank Intervention
We have mentioned Central Banks a few times in previous chapters. You understand how general banks are responsible for protecting and managing the banking system of their country. Sometimes, it's in the economy's interest to weaken its currency so that the Central Banks can build reserves or provide money to the country's banks. A Central Bank intervention is a monetary policy whereby they intervene in the Forex market to manipulate the currency's value to protect or stabilise the exchange rate. Or, they will lower interest rates, which serves a similar purpose.
Employment Change
Employment change statistics report on the changes in employment compared to the previous month. It reports on how many people became unemployed and how many people gained employment. It's common sense to consider the effect of unemployment on the economy. Without a job, people are not spending. The higher unemployment, the less money is coming into the economy. With less spending, the economy loses buoyancy, and this will affect the currency prices in the Forex market
Retail Sales Index (RSI)
The Retail Sales Index is a short-term measure of consumer spending by assessing any changes in both the volume and value of sales of retail goods in the UK. The results of which are an indication of the strength of consumer spending and economic performance.
As you can imagine, if retail sales are low, it may be because unemployment is high. It's always worth checking statistics across a variety of announcements.
Monetary Policy Statements
Monetary Policy refers to the actions taken by the Central Bank of the country to control the supply of money. Central Banks have macroeconomic goals they must achieve to sustain economic growth.
Cash Rates
Cash Rates are also known as bank rates or base interest rates. The cash rate is the market interest rate set by the Central Banks.
Financial institutions, such as commercial banks, often require overnight loans. The Federal Reserve in the United States is an example of a source of borrowing for financial institutions. Commercial banks set their interest rates for borrowing, and they base their rates on current cash rates. Central Banks can manipulate interest rates to encourage or dampen consumer spending.
Key Points From This Chapter
- Working with an Economic Calendar is a way of managing risk and can help to minimise losses
- High-impact announcements can cause volatility in the Forex market
- Not all economic news has an impact on the Forex market
- Compare data across economic news announcements to see if a currency is likely to weaken or gain strength
- Check your Economic Calendar for red – high-impact – announcements
Conclusion
You now know why it's essential to include an Economic Calendar in your Forex trading strategies and protocol.
In the next chapter, you will learn how to install and use the MT4 trading platform.
