Forex Trading Using the Economic Calendar
The Forex markets are heavily driven by global news and statistics, and are thus almost always volatile. If you’re trading Forex, then having an up to the minute economic calendar is absolutely vital. Economic calendar will tell you which economic events are planned and that they are leading up to, in real time, counting backwards to each one. This means that you’ll be able to trade in advance and get in and out at peaks, before the price of the currency pair drops back down.
One of the biggest advantages of having your economic calendar is that it gives you a headstart on interpreting the data release. Take for example the release of consumer spending in May. That’s good news for exporters, car manufacturers and banks who need to make purchases if there is going to be a pick up in world economies. But what does this actually translate into for you? It means you have more time to spot a possible low liquidity position in the currency pair before it’s triggered and you can jump on it before the price goes through the roof.
But how do you interpret the data releases? There are several different ways that you can do this. For example, many traders look at the Consumer Price Index (CPI) and base their trading decisions on it. The problem with relying solely on the Consumer Price Index (CPI) is that it is notoriously unreliable. It changes so quickly and tends to become skewed by inflation. Other indicators that you can use to help you with your forex economic calendar include Producer Price Index (PPI) and Producer Cost Index (PCI).
By now you may have noticed the two items mentioned above. Let’s now discuss how you can interpret these indicators in your trading strategies. When you have an understanding of what they mean, you’ll know whether or not a particular currency should be bought or sold. One example of this would be when you see a sudden increase in the GDP growth in China. If you think the dollar will soon drop in response to this good news, you’d better sell the EUR/USD or the USD/JPY as it will likely suffer the same fate. In this case, the EUR/USD would be the ideal trading currency since the interest rates are constantly in the single digits, making it a safe haven to keep profits.
You should also be aware that there are other indicators besides the economic calendar that could have significant impacts on currency pairs. One example would be the unexpected increase in inflation. Here the data release from the Bank of Japan has confirmed that the central bank will pump more money into the economy to prevent deflation. If you’re a trader who believes the EUR/USD will fall due to deflation, you should hold off until the data comes out in September or October. This way, you’ll have plenty of time to react to the expected rise in the currencies of both Japan and China.
Some traders try to predict the effect of the economic calendar on particular currencies by looking at trends in the past. The problem with this strategy is that history doesn’t always repeat itself. For instance, in the last two decades, many currencies experienced a low depreciation and high growth. But more recently, with the global financial crisis, many countries have dealt with large economic declines and high interest rates. Traders might therefore expect the EUR/USD to depreciate given the past performance of the currencies.
One way to overcome this problem is to look at the economic calendar as a tool for prediction. Instead of looking at the data release for the GBP/USD, look at the data for the Euro and the US dollars. If there’s a common pattern in the past three years where the currencies lost a large amount of value (for instance, in the EUR/USD during the 2021 summer months), then this would be an indication that the EUR/USD may go down during the trading day. Similarly, if the currencies gain volatility over a long period, then this would suggest that the EUR/USD might rise during the trading day.
In conclusion, the economic calendar can play a role in forex trading. It allows traders to take advantage of short-term fluctuations in the exchange rates of particular currencies. By taking advantage of the information provided, one can make some good profits in the forex market. However, remember to use the information wisely. Don’t use it as your only form of trading strategy.