Economic calendar and peculiarities of trading on the fundamental analysis in the market
Fundamental economic factors and Trading on the fundamental analysis of the Forex market - is not an abstract concept at all. Every day traders encounter events in the form of news published in economic calendar. Economic indicators come out in the form of reports at a set time (weekly, monthly, quarterly).
Approaches to using the Forex calendar as a trader
There are different approaches to using the economic calendar in the market. Some traders trade "on the news", i.e. they open positions according to their expectations of economic indicator changes (for example, eurozone GDP growth is expected - they buy euro). Others, on the contrary, avoid the news, as trading on them involves some risk. Such traders prefer to wait for the market "digests" the news and enter the formed trend. You need to watch the news regardless of the trading strategy you choose. For example, NFP (Nonfarm Payrolls) US labor market indicator often causes sharp movements of currency pairs, which can lead to closing your position by a stop loss.
How to read the economic calendar?
- Forecast value (consensus)
Usually this value is taken from a survey conducted by a news agency (Bloomberg, Reuters, etc.). These organizations interview 20-240 economists, extreme opinions are removed from the sample, and the average is calculated from the remaining forecasts. Consensus forecasts by different agencies may differ.
- Actual value
This is the actual value published by an official source (a country's statistical service or a recognized think tank).
- Deviation
This is the difference between the actual value and the forecasted value. For example, the PMI was expected to be 50.0 points, but it turned out to be 50.3. The deviation equals 0.3 points.
- Revision
This is the change in the value for the previous period, usually last month. If the revision is large, it can have quite a strong effect on the market. The market reaction will be even stronger if a large deviation is combined with a large revision.
For every important fundamental release, there is a consensus forecast value, which is determined in advance by economists. If the actual value differs from the forecast value, market participants will be surprised and react to the news immediately. The bigger the surprise, i.e. the deviation, the stronger the market reaction will be. Historical data can be used to predict how strong the price movement will be due to a particular deviation. For example, if a currency pair consistently goes 50 pips on some deviation, we can expect that the same deviation will again cause a 50 pips price movement.
Trading on the news requires a certain algorithm of action. You should only open a trade when there is exactly the deviation from the consensus that you were expecting.
Practical tips for trading on fundamental analysis
- Concentrate on the most important news that will cause the most predictable market reaction.
- Wait for the indicator to be published and then trade according to the plan.
- The market reaction to the publication lasts from half an hour to 2 hours.
- If market sentiment, technical analysis and news results are all pointing in the same direction, but the market is heading in the opposite direction, you need to act accordingly. It is possible that you are missing some important reason behind the market reaction.
- By default, expect a strong market reaction to the publication of the news.
Methods of trading on the fundamental analysis
Trading on a pullback (recovery)
- Wait for the release of the news. If there is an expected deviation, then use the actual value of the indicator to determine the direction of the market.
- Wait for the market to pull back after the initial reaction, about 10-15 pips from the price level that was before the news release. Sometimes during large deviations, you can enter the market at a distance of 20-30 pips from the price that was prior to the news release. The market is likely to play the news during the first 2-30 minutes after its publication.
- Stop Loss will need to be set at a distance of no more than 35 points from the point of entry into the market. It is important to wait for the market to roll back. If you enter the market too quickly, you can run into a stop.
- This type of trade is easier than heel trading, but sometimes the pullback is too small or, conversely, too big.
2. trading in stilettos
- This method of trading is suitable for trading on important news, which cause a strong movement in the market and which are difficult to interpret. The Non-Farm Payrolls (NFP), which is usually released on the first Friday of every month, is well suited for such trading.
- Look at the range in which the pair is trading before the news is published. Five minutes before the release, put 2 pending orders (BUY STOP and SELL STOP) 20 points above and below the market price. Place Take Profit orders 40 points above and below the corresponding pending orders. As for stop losses, you have two possibilities: to place a stop loss at the market price 5 minutes before the news release, or not to place it at all.
- In case of a positive outcome you will be able to close one of the transactions with a profit (do not forget to remove the second order). In case of very good outcome both transactions will work out for you - at first the first order will be closed with profit, after that the market will sharply turn in the opposite direction (a hairpin) and will open the second order. In this case you can earn 80 points. In case of a negative result the price will make a small movement in one of directions, having opened the first order, but will not reach take profit. Then the price will turn in the other direction and open another trade, but again it will not reach take profit. If you have a stop, losses will be limited. If there are no stops, it is possible to compensate for losses by opening new orders.
Trading on market sentiment
The idea is simple: understand the market mood and open a position in the appropriate direction. There is a short-term and a long-term market sentiment. It's difficult for retail traders to trade in the long term market sentiment because they don't have enough money to weather the large drawdowns that occur during periods of high volatility.
The short-term mood is created by the fundamental news. If the market expects the data to be better than the consensus, it will try to price that outcome in advance. As a result, a "buy on rumor, sell on fact" strategy makes sense. For example, if market participants expect the RBA to raise rates next week, the AUD/USD exchange rate will rise even a week before the meeting. Reserve Bank of Australia: Traders will take into account the prospect of a rate hike in the price. When the RBA actually announces a rate hike, market participants, who were already prepared for such an outcome, may start selling AUD/USD. The rate of the pair will fall, as the big players may try to lock in profits on their initial buy positions.
In order to benefit from this type of trading you need:
- Be aware of upcoming important publications and events several days before they happen. Such events include interest rate announcements, inflation, GDP data, speeches by central bank governors, etc.
- Keep an eye on recent releases and watch the market reaction. If negative news can't move the market down significantly (or vice versa), there must be some reason for it.
- Know how different news publications are related. For example, how retail sales affect GDP, PPI affects CPI, etc. So, if the retail sales data turns out to be much better than expected, there is every reason to prepare for good GDP data. Thus, we can take advantage of the positive market sentiment.
If you see a short-term trend, open trades in its direction. Close such a trade before the news release. The optimal profit on such trade is from 40 to 100 pips, do not go for more - it is better to open one more deal on a pullback after the news release.
It should be noted that not every publication of important news in the economic calendar is suitable for fundamentals trading on market sentiment. If uncertainty reigns in the market, you should not start such trading. You should trade only when there is a clear short-term trend.