Have you ever had one of those trading setups that boasted a staggering amount of confluence fail in dramatic fashion? You know the kind of setups that wouldn’t look out of place as wallpaper on your mobile phone! Of course you have. We all have! One reason the area may have fell flat could have been due to a scheduled news event.
Experienced traders are generally conscious of what’s ahead on the economic calendar and understand how to interpret the numbers. Newer traders, on the other hand, often expose their positions to unnecessary losses around news time. This, especially for technical traders, is not considered ideal trading conditions and should generally be avoided.
What can happen to price action around news events?
Economic news releases have the ability to drastically affect the financial markets. Depending on if market expectations (we’ll get to this) are met or not, this can cause price action to fluctuate rapidly and see trading spreads widen (the difference between bid/ask is called spread – it represents part of broker’s service costs).
It is important to remember that spreads are variable, meaning they will not always remain the same and will adjust as liquidity providers change their pricing.
Traders might also want to note that increased volatility, often caused by news, brings periods of illiquidity in the market, potentially making it difficult to enter/exit at desired prices due to the widening of spreads. This is called ‘slippage’.
What data can one extract from an economic calendar?
To simplify things, we’ll use the economic calendar provided on forexfactory.com as an example:
- The first data point highlights the date and time of the events (marked with a red box). Something that you may wish to consider altering here is the time zone. Setting it to your country’s time zone or a time zone of the session you trade will avoid any unnecessary confusion. You can do this by clicking on the clock located at the top right-hand corner (red circle).
- The next column highlights the currency (yellow box). This informs the trader which currency the news event will likely effect. For example, on the image above we know that at 9.30am the UK (GBP – Great British Pound) is in the spotlight and therefore know to keep an eye on GBP-related currency pairs around this time.
- Next up is the impact column (green box). This area identifies the expected volatility of a specific release. An example might be an FOMC meeting in the US. This typically evokes a strong reaction, and is therefore noted as a high-impacting market mover.
- The yellow tab is used to represent a release that is estimated to produce a low impact.
- The light brown tab is designed to highlight a medium-impacting release.
- The red tab is significant since it signifies a high impact may be on the cards.
- Sliding across to the next column (blue box) you’ll find the name of the event. Examples noted above include: Aussie Company Operating Profits q/q at 12.30am on Monday and the Spanish Unemployment release later on at 8am – both labelled as medium-impacting events.
- The next section titled: ‘Detail’ displays vital information (black box). By clicking on the tab sited to the right of the event name, you’re presented with a variety of particulars, including: news source, what the release measures, typical effect seen on the currency and next release date. It also permits one to view historic values/forecasts and any related stories.
- The following column, in orange, is where the ‘Actual’ number is printed i.e. the outcome of the release. This will obviously not be available until the release date/time (red box).
- The subsequent area covers forecasts (purple area). This shows what economists foresee. Both the forecast and actual columns are significant. As we mentioned at the beginning of the article, depending on if market forecasts are met or not can cause price action to fluctuate rapidly. An example might be US employment figures, which is a major market-moving event published each month. Let’s say economists forecasted a 100K print but the actual numbers came in less than stellar, this would likely cause a broad selloff.
- Next on the list is the ‘Previous’ section (brown box). Here you’ll find what the previous ‘actual’ figure was. However, do remain aware that numbers here can be revised. This is easily seen by the small yellow triangles printed to the right of the value.
- The next section displays a chart tab (pink box). Clicking on this tab will bring up a histogram of the actual vs. forecast figures from past dates.
With a greater understanding of an economic calendar’s features, getting caught unaware should now be a thing of the past. To make sure you’re always one step ahead, it’s advised to note each market-moving event BEFORE your trading day begins.