Identify new opportunities in forex with an economic calendar
The economic calendar is one of the most important tools in a forex trader’s arsenal. This is because important events such as general elections, central bank announcements on interest rate decisions and unemployment rates can surprise the markets.
When something unexpected occurs, investors panic and usually start selling or buying in droves in order to profit from price fluctuations or just in the hopes of salvaging their profits before all is lost.
Trump’s victory in the U.S election in 2016 as well as the Brexit referendum, were both notable examples of how the news can inject high volatility in the currency markets and drive prices in either direction.
If you want to stay abreast of all the relevant news that have the potential to influence the forex market it is crucial that you consult your economic calendar before you enter a trade.
What is an economic calendar?
An economic calendar can inform you of all known upcoming news events and important financial data releases that may affect an economy or the financial markets as a whole. These may range from oil inventory reports, speeches from the ECB on monetary policy, trade balance and unemployment rates.
There are so many economic indicators that forex traders need to watch out for that an economic calendar can alleviate the burden of remembering when these will take place and at what time. Also, most economic calendars can tell you about the results of the previous report as well as the general consensus for the upcoming one.
You will also notice that each event may usually be color coded according to its severity or potential impact on the market as some may be more influential than others. A high-impact event is guaranteed to provide larger price fluctuations and therefore higher profit potential, but it’s important to note that trading these events also carries higher risk.
What you can find on an economic calendar:
- The scheduled time the report or announcement will be released
- The currency or country the report will affect
- The degree of impact the event will likely have on the market
- The numbers of the previous report if applicable
- The consensus or expected outcome of the event
Why are economic calendars needed?
As already mentioned, an economic calendar is crucial for forex traders because of how geopolitical developments and announcements from financial institutions can affect the economy and the price of currencies across the globe.
For example, if the unemployment rate in the U.S drops, that’s certainly good for the dollar. However, if the numbers don’t meet the market’s expectations, the surprise may drive investors and speculators to sell their dollars for other major currencies which as a result will the drive the value of the dollar lower.
Therefore, while it’s important to know when the event will take place, it’s also crucial that you understand how the market is going to react to every possible outcome.
In fact, some traders find that all this information is overwhelming and that trading during these events carries more risk than they can bear. Sometimes it’s best to avoid trading during highly volatile events, but as a forex trader, you should know that market volatility is a great opportunity to trade profitably as long as you trade with a proper position size and modest leverage.
Keeping track of news and events via an economic calendar is a wise choice regardless if you are focusing on the fundamentals or pure technical analysis with indicators such as the MACD, Bollinger bands or Elliot waves.
The importance of interest rates
One of the valuable economic indicators for forex traders is the interest rate of a national currency which is announced by central banks around the world.
The forex market is particularly sensitive to changing interest rates as they can determine how investors and speculators value a currency and it’s vital that you understand why they are necessary.
Central banks which are controlled by the national government are responsible of the country’s monetary policy i.e promote economic growth and keep inflation under control.
Inflation is the growth rate of the prices of both goods and services. When inflation is increasing rapidly, the purchasing power of the currency is diminishing – goods and services are more expensive and therefore your money is worth less.
However, this is supposed to happen, over time, and in moderation, inflation is actually a good thing. Central banks are tasked with the economic stability of the country and as such, they need to make sure that the inflation rate remains on target at all times. This is mainly achieved through interest rate manipulation.
When a central bank lowers interest rates, it decreases the incentive for outside investors, but it also makes purchasing and loans cheaper for locals which boosts the economy. More spending translates to higher demand for goods and services which then leads to higher inflation rates.
Therefore, in order for a central bank to manage inflation metrics, it should increase its interest rates in order to reduce spending and loans and slow down the economy.
Open an account now to get access to CM Trading’s economic calendar as well as an array of other powerful tools that can help you trade profitably in the financial markets today.