One of the keys to success when trading forex is to know why the market is moving in a certain way, and to be able to anticipate these moves. On the whole, the biggest market-moving events tend to be the release of key economic data such as the US nonfarm payroll number. While the reaction of the market to these announcements can be unpredictable at the best of times, they do present excellent trading opportunities.
Experienced traders continuously analyse future economic events in attempt to foresee currency movements. They stay way ahead of event announcements and act accordingly so that by the time an announcement is made they will have already priced the value of their currency pair.
The simple yet efficient way to managing information from announcements is to keep an economic calendar. Through use of this important tool, you can track key indicators that will show you where the market is headed and what will impact your currency movements. The best traders out there highlight specific indicators because they spot that they are likely to be particularly influential or significant.
A hypothetical example of this, say that the Bank of England and the European Central Bank plan to meet later next month to discuss interest rates policy. It would be likely that in this meeting the policy makers take a decision on whether rates should be altered or be left as they are. Through knowledge of this meeting you can act by forecasting whether the rate will be raised or lowered. An experienced trader will take long or short positions in both the GBP/USD and the EUR/USD respectively. If however interest rates are anticipated to remain the same, traders will examine other factors that might effect the direction of a currency pair.
Choosing a Calendar
So, it is clear that being in the know of future economic and political indicators is beneficial to a forex trader. There are alternative ways to keep an economic calendar. You can search online for key indicators, creating your own calendar by inputting the information manually. Otherwise, there are many online calendar platforms out there that update indicators automatically and will provide you with the information.
If you choose to go down the route of the latter, there will be much information so it is wise to sort out the provided indicators by what is most important so that you don’t get bogged down. One way you could do this is to copy the indicators from the calendar you are using and paste the entire list into a document or spreadsheet. You can then highlight important events and delete the ones you deem less important.
Many brokers include a free trading calendar service with their platforms, but there are also some excellent ones available online, such as these:
Indicators to include in your Calendar
Because the US dollar accounts for such a large proportion of global currency trades, major economic announcements from the U.S. have the biggest influence on currency prices, even for currency pairs which do not include USD. We published a fairly comprehensive run-down of these on Wednesday, but here’s a brief summary of the important ones to watch.
The most important number is GDP (Gross Domestic Product) as this measures the sum of all goods and services in a country. Industrial production measures how much is produced in a nation’s factories, mines, or utilities. PMI (Purchasing Manager’s Index) monitors manufacturing conditions. Durable goods orders are orders for products that last more than three years of use. When they depreciate it likely indicates caution to spend.
Another important indicator for forex analysis is the Producer Price Index (PPI) and Consumer Price Index (CPI), which measure the average prices for sellers and buyers. This is the best way to measure inflation.
Once you gain knowledge of the major factors, you will then understand which smaller indicators look out for as well.
Act on the Information
Now that you have obtained your information, plotting it in your calendar and you are keeping track, you need to act. You notice from your calendar that a an announcement date is approaching; what is to follow is that a consensus will be forecast as to what to expect from said announcement. As a forex trader you will then begin to price the new data and adjust your trades accordingly.
Economic announcements and political news can steer the direction of your currency pair in seconds. Through the use of your economic calendar, you can respond quicker than everyone else in the market. When you know that a trade release is imminent the first thing you have to decide upon is- will it cause low or high volatility? Your reaction to a news release depends on where you are in the trade and where your stops are.
So this is why leading indicators are important to your trade. You can make money when you have advanced information and you can predict the direction a currency pair is going.
Using an economic calendar also allows you to follow trends. The concept here is that the market will only realise what is happening gradually. If you spot a trend in a currency pair and know that it is happening because of an announcement, you might be able to benefit from the rest of the trend. This approach is less profitable and caution is required from this strategy as it only works when you’ve analysed the trend, confirming it by looking at previous announcements.
Don’t Forget the Big Picture
To be highly effective in Forex trading, you have to consider all economic and political factors across your currency pairs and go even further by keeping the bigger picture in mind. Indicators may arise from economies whose currency you’re not trading in but may affect those that you are trading. Be sure to consider all aspects that need to go into your calendar.
Ultimately, the indicators that you discover from your calendar are there to act as the impetus you need to make an informed decision. The more you know and understand about the factors affecting the Forex market, the better chance you have of profiting.