Why you should refer to a forex economic calendar before every trade

Forex news can have a significant albeit short-term impact on currency exchange rates. If the news is unexpected or doesn’t confirm the market’s sentiment, you are likely going to notice sharp spikes and increased volatility as liquidity dries down.

Why you should refer to a forex economic calendar before every trade

As a forex trader, a forex economic calendar is one of the most important tools that you can have at your disposal. Profit and pip calculators, technical indicators and charting platforms, as well as the various plugins offered by your broker of choice are also critical components but staying abreast of any upcoming economic releases is crucial to your trading strategy.

In fact, following the economic data that comes out from each country is an important part of fundamental analysis which many traders subscribe to religiously. Information such as interest rates and employment rates are particularly important as they can impart key insights into a country’s economic health and performance.

Therefore, a forex economic calendar that keeps track of this information and when each announcement is going to be made public, can help traders anticipate exciting market opportunities.  Breaking news regarding the political climate of a country also can affect the global currency markets and those who manage to open their positions quickly enough, can capitalize on these movements and reap substantial rewards.

Investors are quite vulnerable to economic announcements and events and typically these can trigger frenzied buys or sell-offs. As supply and demand battle it out, either risk appetite or aversion may be the outcome.

As such, the more conservative trader, who wants to avoid trading during volatile environments where exchange rates move extremely rapidly, a forex economic calendar can serve as a schedule of the dates and times that the market will react unfavorably. 

Forex Calender

 

How to incorporate a forex economic calendar into your strategy

Regardless of the source, an economic calendar normally should include the currency that will be directly affected, and the anticipated volatility based on previous releases. Each report’s or announcement’s impact on the market can be more muted or pronounced depending on the sector it refers to as well as the expected results.

Therefore, your first step before trading a currency pair is to check whether there are any high-impact economic data that may influence movements in any of the two currencies in the pair. It’s important to note, however, that even if a report doesn’t directly affect a currency, it can indirectly interfere with supply and demand due to how global trade works.

For example, when one currency is in decline, it’s much more likely to attract foreign interest and increase its exports. If you are interested in trading the EUR/USD pair, the China – U.S trade war may devaluate the Chinese Renminbi (RMB) to a point where Chinese products are much more competitively priced than their European counterparts.  This will result in a devaluation or the euro while the dollar may continue to rise.

Another important element in an economic calendar is the addition of the industry consensus regarding the upcoming event as well as its previous outcome. The numbers of the previous release can serve as a reference point in order to gauge the strength of the underlying sector and therefore are extremely useful to know when trading big news events.

If the forecast consensus predicts a strong performance, then you may want to buy the pair before the report comes out in order to grab the maximum amount of pips the market will move. This, however, isn’t a sustainable way to trade as the market can react in unexpected ways and you are likely to lose most of your trades if you continue with this approach.

A more sensible tactic would be to wait for the market to digest the news and then try to trade with the new trend after the fact. This method guarantees that you take advantage some of the opportunity created by the news without excessive risk.     

 

 

Conclusion

A forex economic calendar is your first step in developing a consistent trading strategy that bears in mind both the macroeconomic as well as the microeconomic activity in the market.

Both aggressive and conservative traders can benefit from consulting an economic calendar before trading their favorite currencies as the information it includes may help you decide on your entry timing and direction.

 

Head over to our forex tools section to discover even more useful tools that can help take your trading to the next level.

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