How to use an economic calendar when trading
There are many strategies you can implement as a trader, including fundamental and technical analysis. A key part of these trading techniques is the use of an economic calendar. By understanding the events that can influence a financial instrument and its price movement, an investor can determine his position in the market.
If you are new to financial trading or are an experienced trader looking to adapt a new strategy, we will explain in more detail how a economic calendar can help you with your investment.
What is an economic calendar?
An economic calendar is more than your average calendar because it presents a calendar of upcoming announcements or events that could impact an individual asset, industry, or an entire financial market.
This is an important part of a trading strategy because scheduled economic events can impact the market. If an investor knows when these events will occur and their likely effects, they can better prepare and act on them.
For example, if you participate in online forex trading Then the US Non-Farm Payroll Report will be a report to watch, and it is guaranteed to be released on a monthly basis. The market is reacting to the data in this report because it features the nation’s unemployment rate – a huge indicator of the country’s overall economy, therefore will affect the US dollar currency pairs.
Of course, some events are unpredictable and can still have a major impact on the markets, such as the recent coronavirus pandemic. But in general, an economic calendar can provide another perspective on potential market trends and help investors to speculate on forecasts of relevant price movements.
How to read an economic calendar
The purpose of an economic calendar is to predict the impact of events on financial instruments. It is a key tool for online trading and is generally easy to understand.
While there are variations depending on the trading platform you are using, you will find three main components when reading an economic calendar:
- Country and Event: Most economic calendars will explicitly state the name of the event or announcement, which will define its subject. Investors can use it to determine which assets it is likely to influence. It will also show the country to which the event is linked, which also helps to conclude the instruments on which it will have an impact.
- Time: Investors must act effectively when there is a change in the market, which is why timing is especially important. An economic calendar will give an estimate of the time of the event, allowing traders to prepare to enter or exit the market in a sufficient amount of time.
- Expected impact: This is an indication system on the calendar that shows the expected level of impact of the event. An investor will need to use their own initiative and research, but the expected impact can help traders estimate whether the particular event will affect their investments. In some cases, these are represented by three colored circles with an expected low, medium or high level of impact.
These components are typically displayed in a columnar format chronologically, but can be refined by day, week, month, or a specific period of user-defined dates.
How do you use it when trading?
An economic calendar is only one tool in an investor’s arsenal, and is most effective when combined with charts, graphs and other indicators as part of a technical strategy. This gives traders a significant amount of data to predict the trends of the affected assets and market.
When trading, the economic calendar will gather data surrounding an important event such as name, location, time, relevance, and related instruments on which it is likely to have an impact.
The majority of financial events will already be scheduled, so an investor can align their trading decisions with the timing and relevance of the event or announcement. For example, when trading forex, announcing interest rates will play a key role in your reaction to the market.
When a central bank determines that interest rates will rise, it can have a negative or positive impact on the economy, depending on the state of recession in the country in question. This will then have a direct impact on the relevant currency pair, for example the Bank of England will influence the British Pound.
The same event can also have an effect on stocks and commodities, as its impact on the forex market may cause investors to look elsewhere, looking for less risky investments. Those who are already investing in these particular assets should therefore be aware of this expected impact on their own business decisions.
An economic calendar will feature a series of events like this, which will help investors predict the potential performance of financial instruments, sectors and the market as a whole.