Master the economic calendar, and you’ll never be caught off guard by a scheduled market-moving headline again.

Introducing the Forex Factory economic calendar

Forex traders, especially day traders, use Forex Factory (or similar websites like Forex.com, FXStreet, and BabyPips) to keep up to date with all the news that moves the forex market. This is highly convenient, if not essential. These resources, free or paid, collect all the upcoming economic data releases and forex news events. Then, they put them into an economic calendar. Examples include Fed meetings and announcements like non-farm payrolls (NFP). All of these are shown in one convenient chronological view.

The calendar looks as follows:

As you can see, there are 10 columns. Most of this is self-explanatory, but let’s highlight the most important ones:

Currency: The code for the currency most likely to be affected. Most of the items you’ll see here, unsurprisingly, are one half of a major forex pair.

Impact: A qualitative indication of how likely this event is to cause a significant move in the forex market. 

Detail: Click on this to see some more information about how this data item is reported, what it generally means, how often it occurs, and what values were seen in previous periods.

Actual: The data, once a figure is available, is shown here.

Forecast: What the consensus forecast is, as supplied by economists polled by Reuters or Bloomberg.

Previous: What the result was in the previous release, normally the previous month or quarter.

Graph: Click here to see a visual representation of how the data has moved over time, which is obviously useful to discern any trends.

How to plan trades with the help of an economic calendar

Having all of this information at your fingertips is incredibly satisfying. The interface is a lot of fun to scroll through. Moreover, it is certainly a better use of a forex trader’s time than reading the mass-market reporting about current events. It is also better than reading more general economic news and analysis. Knowledge without action isn’t of all that much use, though.

The next step is to use the economic calendar to start trading the forex market more intelligently. In order to do this, we first have to understand how economic data can impact the relative prices of various currencies. Using the news to trade forex is therefore an example of fundamental analysis.

Fundamental analysis, in case the term has slipped your mind, is technical analysis’s older, more serious sibling. Instead of fixating on short-term price trends and movements, it incorporates information from various sources and of various types – the macroeconomic environment, quantitative ratios, historical precedents, industry performance, and even non-numerical data – as a means of determining whether some asset or security is over- or undervalued.

As you can probably guess, fundamental analysis can be a pretty complex game. Fortunately, a deep understanding of what every data point means or an ability to make accurate economic forecasts is unnecessary. This is true if you’re only interested in trading based on news items affecting the forex market. This type of trading strategy is known as “forex news trading” or “trading the news”.  

News trading using Forex Factory

News trading is all about gaining an edge in terms of timing. While more technically orientated forex traders may prefer to wait for several graph periods to confirm that a trend is developing, trading the news means buying or selling a forex pair the moment new information comes out. 

The economic calendars hosted online, some of which are more comprehensive and complete than others, are useful tools for planning around coming events and seeing the news as soon as it arrives. Bear in mind that many of these, including the Forex Factory calendar, are free to use, so there can sometimes be a lag. A Bloomberg Terminal would almost certainly deliver the news quicker. However, one also costs thousands of dollars per month, a little more than most retail traders can afford. If the lag becomes prohibitive, you may want to look for an alternative news aggregator. You can also draw your data directly from primary sources (eg. national central banks, industry organisations’ websites, etc.). 

Again, forex news trading is all about speed, not thoughtful, detailed interpretation of macroeconomic developments. If a delay in your information cycle causes some currency price to have already moved before you can take a position on it, it is better to skip that trade.

Forex news trading in practice

All investment decisions rely on information: companies’ quarterly earnings, unemployment numbers, interest rate decisions, and even weather forecasts. The word “forecast” is key here. Price movements immediately after information becomes available do not depend on the reported numbers themselves so much as how they differ from what was expected.

For this reason, forex traders who operate according to an economic calendar tend to evaluate each news item by comparing the actual data result with the forecast as well as the previous reading. All else being equal: 

1. If the actual data beats (is better than) the forecast, then the related currency will go up.
2. If the actual data misses (is worse than) the forecast, we can expect that the currency in question will decrease in value.

Let’s take an example from the economic calendar shown above:

Here, Canada’s (CAD) CPI has seen a shock decline from the previous month, in addition to missing the forecast. In concrete terms, the 0.5% actual figure is lower than the 0.7% most economists predicted, as well as the previous number of 0.6%.

Forex Factory ranks this as a high-impact news event; the associated icon is cherry red. The result of this data should be to send CAD lower, perhaps dramatically. How may a trader take advantage of this forex news item?

The usual way of trading the Canadian dollar is to buy or sell the major forex pair USD/CAD. So, since the CAD is expected to weaken, we buy USD and sell CAD. i.e. we buy USD/CAD.

Forex Factory’s news tab

Of course, forex trading is rarely as simple as the above example. Traders who do not pay attention to information that can’t be put into numbers put themselves at risk of being caught unawares.

Forex Factory and similar websites therefore also display economic and financial market news. This may be accompanied by expert analysis, opinion pieces, and even forex market signals.

Jumping right in and trading on the basis of a news item without bothering to understand its context and ramifications…is not the greatest of ideas. Instead, a wise forex trader might take a minute to read market analysis about the Canada CPI data release before the actual figure comes out.

Example news headline trade

In this example, ING Bank produced an article previewing the economic data release and putting the higher inflation number in perspective.

Aside from making some effort to understand why macroeconomic statistics move in a certain direction and how exactly this affects the forex market, certain risk management parameters should also be decided before engaging in any trade.

Let’s look at a USD/CAD price chart to illustrate (the one provided by your chosen online trading platform should look similar):

USD/CAD price chart (1-minute timeframe)

By analysing this, a trader can use some basic technical analysis of support and resistance to pre-determine entry and exit points for the trade even before the news is released.

The thought process underlying the trade may go something like this:

• The news item will be released at 14:30.
• A forex-focused news article on the event suggests a miss is possible, so prepare to buy (long) entry.
• Trade entry will be a market order based on the 1-minute candlestick at 14:30.
• The stop-loss could be set underneath the two recent lows on the candle chart.
• The take-profit order can be set at the recent high.
• Wait for the news to be released.
• If the data misses as expected, place the market order.
• If the data comes in line with or beats expectations, make no trade and look for other opportunities instead.

Conclusion

Relying on any single technique or information source for your forex trading is generally not sustainable. While “trading the news”, analysing Japanese candlestick patterns, or following trends are all good ideas by themselves, each should be used to supplement the others.

Even if you don’t plan to spend half your time reading financial newsletters or gazing at an economic calendar, these resources should not be ignored. If nothing else, you can expect increased market volatility immediately before and after major news events.